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The   Cycles   of 
Speculation 


Thomas  Gibson 


The  Moody  Magazine 
and    Book    Company 

35  Nassau  Street,         New  York 
1917 


Copyright,  1907,  by 
THE  MOODY  CORPORATION 
All       rights      reserved 


Copyright,  1917,  by 
THE  MOODY  MAGAZINE 
AND      BOOK     COMPANY 


S5 


CONTENTS 

Part  I 
Chapter  Page 

I.     Introduction   5 

II.     The  Cycles  of  Speculation 21 

III.  The  Gold  Supply 37 

IV.  Money    59 

V.     Political  Influences,  Crops,  Etc 77 

Part  II 

VI.    Puts  and  Calls 89 

VII.     The  Question  of  Dividends 101 

5                   Basing  Railroad  Values 104 

Effects  of  Business  Depression 105 

Undigested   Securities 108 

How  to  Compute  the  Value  of  Rights 109 

Barometer  of  Averages 110 

Best  Method  of  Trading Ill 

Indication  of  Crises 112 

The  Ordinary  Swing  of  Prices 113 

The  Factor  of  Safety 114 

Borrowing  and  Lending  Stock 117 

Scalping    120 

Crop    Damage 123 

Selection  of  Securities 124 

The   Bank   Statement 125 

The  Cycles  of  Stock  Speculation 133 

The  Cycles  of  Grain  Speculation 145 

The  Cycles  of  Cotton  Speculation 155 

Conclusion  163 


QP 


The  successful  speculator  requires  four  things : 

1 — A  knowledge  of  values. 

2 — A  knowledge  of  general  conditions. 

3 — A  knowledge  of  the  machinery  of  specu- 
lation— and 

4^Something  besides. 


Introduction 

The  first  step  in  the  education  of  the  specu- 
lator should  be  to  clear  away  the  illusions 
which  have  grown  rank  through  ignorance,  and 
flourished  through  prejudice.  We  have  heard, 
and  continue  to  hear,  a  great  deal  of  ethical 
talk  on  this  subject,  most  of  which  emanates 
from  people  who  are  not  authorities,  and  who 
have  little  real  conception  of  the  subject.  It 
would  be  pretty  safe  to  assume  that  a  majority 
of  these  same  instructors  speculate  themselves. 
They  place  an  arbitrary  construction  on  the 
word  however,  and  draw  a  dividing  line  be- 
tween stock  or  cereal  operations,  and  other 
forms  of  speculation,  although  the  basic  prin- 
ciple is  the  same  in  all  cases,  i.e.:  to  buy  what 
is  cheap  and  re-sell  at  a  profit.  One  of  the 
most  ridiculous  forms  which  this  pedantry  as- 
sumes is  the  warning  and  preaching  against 
speculation  by  very  rich  men  who  made  their 
own  money  speculating  and  could  not  possibly 
have  acquired  it  in  any  other  way.     Such  ex- 


6  THE  CYCLES  OF  SPECULATION 

pressions  of  opinion  are  bom  largely  of  an  ex- 
aggerated ego. 

The  trouble  with  these  critics  and  advisers 
is  that  they  seldom  approach  the  subject  in  the 
right  way.  With  a  full  knowledge  of  the  fact 
that  speculation  is  an  inherent  part  of  human 
nature,  and  that  a  majority  of  human  beings 
are  bound  to  indulge  in  it  in  spite  of  every- 
thing, these  sophists  simply  rail  against  the 
practice  indiscriminately  instead  of  attempting 
to  point  out  what  is  foolish  and  fallacious.  If 
we  attack  the  practice  in  a  general  way  little 
will  be  accomplished.  If  we  say,  "do  not 
speculate,"  our  audience  will  perchance  give 
us  a  respectful  hearing, — and  go  on  specu- 
lating. If,  however,  we  point  out  w^hat  is  dan- 
gerous and  unreasonable,  confine  ourselves  to 
attacking  the  evils  and  explaining  the  de- 
lusions, some  good  may  be  done  in  an  ecJuca- 
tional  way.  We  may,  if  we  show  by  simple 
logic  that  the  education  and  qualifications 
necessary  to  success  are  too  difficult  to  acquire, 
actually  deter  many  people  from  speculating 
in  certain  lines  at  all,  a  thing  which  could  not 
possibly  be  accomplished  by  mere  blanket 
warnings  against  the  practice.  One  of  the 
most  serious  blunders  in  the  world  is  the  com- 
mon one  of  under-estimating  other  people's  in- 
telligence.    People  are  ready  and  willing  to 


INTRODUCTION  7 

learn,  eind  that  they  do  learn  is  shown  by  the 
decreasing  crop  of  lambs.  It  is  not  nearly  so 
easy  for  the  dishonest  promoters  and  manipu- 
lators to  market  poor  securities  at  high  prices 
today  as  it  was  a  few  years  ago.  And  in  this 
regard  it  may  be  pointed  out  that  the  press  has 
actually,  although  in  many  instances  uncon- 
sciously, accomplished  a  great  deal  on  exactly 
the  lines  suggested  above.  Magazines  and 
newspapers  have,  in  recent  years,  taken  on  an 
educational  character.  Periodicals  once  de- 
voted to  fiction  or  history  now  deal  largely 
with  business  and  social  economics,  and  with 
the  exposure  of  bad  methods  in  high  places, 
the  ruthless  uncovering  of  false  or  misleading 
statistics,  and  the  simplification  of  questions 
hitherto  involved ;  the  public  has  been  gaining 
rapidly  in  education  and  understanding.  The 
fact  that  much  space  in  leading  periodicals  is 
devoted  to  these  subjects,  is  in  itself  prima 
facie  evidence  that  the  people  can  and  will 
learn,  for  with  all  due  credit  to  the  editors  and 
publishers,  it  is  certain  that  the  contents  of 
magazines  and  newspapers  are  selected  in  ac- 
cordance with  what  the  public  demands  and 
likes. 

No  one  will  attempt  to  deny  that  a  majority 
of  public  speculators  lose.  In  a  former  volume, 
the  present  writer  undertook  to  establish  by 


8  THE  CYCLES  OF  SPECULATION 

analysis  of  a  large  number  of  public  accounts, 
the  fact  that  80%  of  the  participators  lost 
money.  A  number  of  critics  commented  on 
this  statement  as  a  body  blow  to  speculation, 
asserting  that  the  writer  had  shown  that  there 
was  "80%  against  the  player."  These  writers 
proceeded  to  compare  this  percentage  with 
that  existing  in  games  of  pure  chance,  such  as 
roulette,  faro,  etc.,  and  wound  up  by  pointing 
out  the  tremendous  drawback  to  the  speculator 
through  percentage  against  the  player.  It 
seems  incredible  that  any  sane  man  should  fall 
into  such  laughable  confusion  of  ideas.  The 
percentage  of  players  who  lose  in  any  game 
has  nothing  to  do  with  the  percentage  against 
the  player.  If  these  critics  established  any- 
thing at  all,  it  was  that  speculation  was  not 
gambling;  for  it  requires  only  a  moment's  re- 
flection to  see  that  in  any  mechanical  gambUng 
game  where  there  is  any  percentage,  no  matter 
how  small,  in  favor  of  the  game,  the  per- 
centage of  players  who  eventually  lose  must 
be  100.  This  being  the  case,  the  gentlemen 
mentioned  were  at  considerable  pains  to  prove 
that,  as  100  per  cent,  of  the  players  did  not 
lose,  speculation  was  not  a  gambling  game  in 
the  strict  sense  of  the  word.  That  is  to  say,  it 
could  not  be  correctly  compared  with  any 
mechanical  device  where  the  element  of  skill 
was  absent. 


INTRODUCTION  .9 

If  we  consider  the  matter  in  a  gambling 
light,  the  percentage  against  the  speculator 
can  be  determined  by  the  proportions  of  com- 
missions, interest,  taxes,  etc.,  to  capital  in- 
vested. Taking  commission  alone  as  our  basis, 
we  will  find  that  he  who  purchases  a  stock  at 
$100  a  share  and  pays  one-quarter  of  one  per 
cent,  commission,  has  a  percentage  against  him 
of  one-quarter  of  one  per  cent.  If  the  specu- 
lator trades  on  limited  margins  the  drawback 
increases  accordingly.  If  we  assume  that  100 
shares  of  stock  are  purchased  in  a  bucket-shop 
on  a  one  point  margin,  without  intention  or 
atfility  to  "re-margin"  the  transaction,  the  me- 
chanical percentage  is  large  (25%)  ;  if  10  points 
margin  is  deposited,  the  mechanical  percent- 
age is  reduced  to  2^%,  etc.  In  the  first  in- 
stance, $25  or  25%  of  the  $100  involved  was 
lost  when  the  transaction  was  recorded,  with- 
out any  change  in  market  price.  In  the  second 
instance,  $25  was  again  lost  or  2^%  of  the 
$1,000  involved. 

There  is  no  doubt  that  fluctuations  in  prices 
of  securities,  cereals  and  staples  are  frequently 
used  as  a  basis  for  mere  gambling  transactions. 
But  the  most  remarkable  feature  of  the  whole 
problem  is  the  fact  that  the  percentage  of  loss 
in  transactions  is  greater  than  the  mechanical 
percentage.     In  the  work  already  mentioned, 


10  THE  CYCLES  OF  SPECULATION 

the  writer  undertook  to  establish  this.  In  500 
accounts  examined,  there  was  a  loss  of  $1,- 
245,000,  and  profits  of  $288,000,  leaving  a  deficit 
of  $957,000.  The  commission  charges  and  in- 
terest amounted  to  only  $275,000.  There  thus 
appeared  a  loss  of  $682,000  which  could  not  be 
attributed  to  a  gambling  percentage.  It  may 
be  added  that  the  period  considered  in  the  com- 
putations was  from  July,  1901,  to  March,  1903, 
and  that  the  price  of  the  stock  considered  (U.  S. 
Steel  Common)  was  the  same  at  the  beginning 
and  the  end  of  the  period. 

This  tends  to  again  refute  the  theory  of  mere 
gambling,  with  a  ruinous  percentage  against 
the  player,  for  no  mechanical  device  could  by 
any  possibility  operate  against  the  player  to  a 
greater  extent  than  the  fixed  percentage  in 
favor  of  the  machine.  A  gambling  machine 
will  stick  to  its  knitting.  If,  for  example,  we 
take  the  simplest  form  of  gambling  device — 
two  dice  thrown  from  a  cup, — we  know  thai 
certain  numbers  formed  by  adding  the  total 
spots  which  appear  uppermost  will  show 
more  frequently  than  others.  Thus  the  number 
two  can  be  effected  in  but  one  way,  the  number 
three  in  two  ways,  the  number  four  in  three 
ways,  and  so  on  up  to  the  number  seven,  which 
can  be  formed  by  six  different  combinations, 
thus: 


INTRODUCTION  11 

4  and  3 

5  and  2 

6  and  1 
3  and  4 
2  and  5 
1  and  6 

from  which  point  the  chances  decrease 
until  the  number  12  can  be  formed  in  only  one 
way — two  sixes.  This  proposition  applies  to 
all  forms  of  mechanical  gambling,  and  is  so 
simple  in  principle,  and  so  distinct  in  operation 
that  if  we  make  a  fair  number  of  casts,  say 
1,000,  and  do  not  make  more  sevens  than  any 
other  one  number,  we  may  be  positive  that  the 
dice  are  defective,  or  loaded. 

Therefore,  if  percentages  hold  true,  we  must 
attribute  the  surplus  loss  in  speculation  to 
mental  operations.  In  the  total  results  men- 
tioned, these  mental  operations  were  so  errone- 
ous as  to  cause  a  loss  greater  than  the  percent- 
age itself;  but,  on  the  other  hand,  a  certain 
number  of  accounts  showed  profits;  that  is  to 
say,  the  percentage  was  overcome,  which  is 
again  an  obvious  impossibility  in  true  gam- 
bling. 

The  conclusion  is  offered,  therefore,  that  not 
only  can  poor  methods  and  imperfect  under- 
standing result  in  losses  far  in  excess  of  a  de- 
monstrated drawback,  but  that  this  drawback 


12  THE  CYCLES  OF  SPECULATION 

may  be  overcome  by  other  and  more  correct 
methods.  It  is  difficult  to  understand  why  the 
opponents  of  speculation  are  continually  harp- 
ing on  these  points  of  gambling  and  percentage 
as  bearing  particularly  on  operations  in  stocks 
or  commodities.  If  a  man  buys  a  certain  se- 
curity because  it  is  cheap,  or  because  he  con- 
siders it  cheap,  and  pays  a  certain  commission 
to  a  broker  for  effecting  the  transaction,  he  is 
no  more  playing  a  percentage  game  than  if  he 
purchases  a  piece  of  real  estate  because  it  is 
cheap  and  pays  the  real  estate  broker  a  com- 
mission for  his  services. 

Marginal  trading  is  another  abomination  of 
the  anti-speculative  element,  but  here  again 
the  critics  do  not  discriminate  between  use  and 
abuse.  Trading  on  insufficient  margin  is  one  of 
the  greatest  evils  in  the  speculative  world  and 
when,  as  is  frequently  the  case,  this  evil  is  com- 
bined "with  lack  of  knowledge  as  to  values  and 
conditions,  the  result  is  certain  loss.  But  what 
is  objected  to  here  is  the  hazy  view  and  com- 
prehensive condemnation  of  all  marginal  specu- 
lation. The  line  of  demarcation  is  usually  care- 
lessly drawn.  If  an  individual  buys  100  shares 
of  stock  for  cash,  has  it  registered  in  his  own 
name  and  later  borrows  funds  from  his  banker 
with  these  shares  as  collateral,  he  escapes  im- 
peachment as  a  marginal  speculator;  but  if  he 


INTRODUCTION  13 

buys  on  margin,  and  borrows  from  his  broker 
the  unpaid  balance,  he  is  a  gambler.  And  yet 
it  would  be  hard  to  point  out  the  difference  in 
the  two  methods.  If  we  wish  to  go  a  little  fur- 
ther afield,  we  may  reduce  a  very  large  per- 
centage of  the  commercial  structure  to  mar- 
ginal trading.  We  may,  in  short,  place  in  this 
category  every  merchant  who  buys  goods  on 
credit  and  every  man  who  buys  real  estate  on 
payments,  if  their  object  when  buying  is  to  sell 
at  a  profit. 

It  is  highly  probable  that  these  contentions 
will  be  vigorously  attacked,  on  the  theory  that 
more  evil  than  good  results  from  speculative 
ventures,  and  that  therefore  the  whole  struc- 
ture should  be  razed  on  a  "greatest  good  to  the 
greatest  number"  basis ;  but  aside  from  the  in- 
tensely unphilosophical  character  of  this  view, 
it  is  not  at  all  probable  that  any  such  thing  can 
be  effected  unless  human  nature  undergoes  a 
radical  change.  Tear  down  every  stock  ex- 
change in  the  United  States  tomorrow,  and 
people  will  be  speculating,  a  majority  of  them 
foolishly,  in  another  week..  The  cure  lies  not 
in  paternalism,  but  in  evolution  and  under- 
standing. As  has  been  said,  more  has  been 
accomplished  in  recent  years  by  the  educa- 
tional crusade  of  the  press  than  by  all  the  rant- 
ings  and  warnings  of  a  century.    We  have  our 


14_       THE  CYCLES  OF  SPECULATION 

periods  of  reckless  over-indulgence,  it  is  true, 
but  the  evil  is  dwindling.  The  South  Sea 
bubble  would  deceive  a  much  smaller  number 
of  people  today  than  it  did  in  the  days  of  John 
Law. 

It  is  the  object  of  the  present  work  to  point 
out,  so  far  as  the  abilities  of  the  writer  will  per- 
mit, what  essentials  are  required  in  any  form  of 
speculation,  whether  on  margins,  or  masquer- 
ading in  the  guise  of  investment.  As  to  this 
last  distinction,  it  may  be  stated  that  the  word 
"speculation"  is  herein  taken  to  mean  the  pur- 
chase of  any  security  or  commodity  because  it 
is  considered  cheap,  with  the  ultimate  intention 
of  disposing  of  the  property  so  purchased  at  a 
profit.  In  the  writer's  opinion  this  definition 
is  correct.  Speculation  contemplates  a  rise  in 
price,  and  an  accretion  in  principal.  Invest- 
ment refers  to  interest  returns  on  money. 

One  of  the  most  flagrant  errors  in  specula- 
tion is  an  entirely  mistaken  idea  as  to  the 
possibilities  in  this  field-  Nine  men  out  of  ten 
have  a  deep-rooted  conviction  that  if  any  indi- 
vidual could  be  right  in  his  main  deductions 
for,  say  one  or  two  years,  he  should  make  mil- 
lions on  a  small  capital.  This  is  a  great  mis- 
take, and  leads  to  numerous  minor  errors 
which  are  productive  of  much  loss  in  actual 
operations.    The  business  of  speculation  never 


INTRODUCTION  15 

did,  and  never  will  result  in  abnormal  profits. 
Large  returns  are  sometimes  made,  it  is  true, 
but  this  fact  is  also  true  of  every  other  line  of 
business.  Certain  individuals  grow  very  rich 
in  Wall  Street ;  this  again  is  true  of  every  com- 
mercial branch.  We  hear  now  and  then  of  a 
million  dollar  coup  by  a  Morgan  or  a  Rocke- 
feller, and  do  not  stop  to  consider  the  great 
capital  behind  it.  If  an  individual  makes  five 
thousand  dollars  in  a  year's  speculative  ven- 
tures on  a  capital  of  twenty  thousand,  he  is  not 
considered  a  Napoleon  of  finance,  but  he  has 
accomplished  much  more,  in  proportion  to  his 
capital,  than  Rockefeller  would  have  accom- 
plished if  he  had  made  five  millions  on  similar 
operations. 

In  a  recent  conversation  with  a  number  of 
gentlemen  who  clung  tenaciously  to  this  idea 
of  sudden  riches,  the  writer  undertook  to  es- 
tablish his  contention.  Tapes  were  secured 
recording  the  fluctuations  of  sugar  stock  during 
a  twenty  point  decline.  The  skeptics  were 
given  a  hypothetical  capital  of  $10,000  each, 
subjected  to  the  ordinary  rules  of  trading  as  to 
margins,  etc.,  informed  that  sugar  would  de- 
cline twenty  points  before  it  again  touched  the 
first  quotation  established,  and  invited  to  "get 
rich  quick."  The  result  was  ridiculous  in  the 
extreme.    Two  of  the  experimenters  lost  their 


16  THE  CYCLES  OF  SPECULATION 

imaginary  capital  trying  to  double  up  and 
show  large  returns.  The  third  took  an  unfair 
stand,  by  selling  the  maximum  amount  at  the 
inception  of  the  experiment  and  closing  it  after 
the  20  point  decline  had  appeared.  His  oper- 
ations, therefore,  proved  nothing.  Here  was  a 
case  where  two  traders,  possessed  of  an  abso- 
lute fore-knowledge  of  what  was  to  occur,  lost 
ever)rthing  through  the  fault  of  over-specu- 
lation and  the  belief  that  abnormal  returns 
could  be  made  if  the  ultimate  fate  of  a  market 
could  be  correctly  forecasted.  Even  if  we  as- 
sume that  every  intermediate  movement  were 
known  in  advance,  that  after  a  ten  point  de- 
cline there  would  be  a  five  point  advance,  and 
that  transactions  were  conducted  to  the  full 
possibilities  of  both  original  margin  and  ac- 
crued profits,  the  result  would  not  be  the  mil- 
lions which  dazzle  the  eyes  and  imagination  of 
the  unsophisticated.  But  to  assume  any  such 
trading  is  foolish.  The  factor  of  safety  would 
be  wholly  absent.  No  wise  man  will  ever  at- 
tempt pyramiding,  and  no  foolish  man  who 
does,  will  succeed. 

In  order  to  clear  the  ground  for  discussion 
or  study,  the  first  thing  to  eliminate  is  this 
wholly  unsupported  and  mistaken  idea  of  sud- 
den riches.  No  matter  how  correct  the  fore- 
cast of  the  future  may  be,  safety  disappears  in 


INTRODUCTION  17 

inverse  ratio  to  the  increased  possibilities  of 
abnormal  returns ;  and  with  the  factor  of  safety 
continually  ignored,  the  final  results  are  bound 
to  be  disastrous. 

It  will  also  be  necessary  to  dispel  another 
illusion.  If  the  speculator  imagines  that  he 
can  operate  successfully  without  preliminary 
hard  work  to  fit  him  for  the  business  in  hand 
he  is  grossly  mistaken.  It  is  necessary  to 
qualify  in  this  field  as  well  as  in  any  other. 
Knowledge  of  monetary  conditions,  values,  in- 
terest rates,  and  in  fact,  of  all  influences  bear- 
ing directly  or  indirectly  on  the  future  of  prices 
must  be  acquired  and  thoroughly  understood. 
Ignorance  on  any  one  point  may  mean  defeat. 
On  the  other  hand,  a  study  of  such  conditions 
means  a  liberal  education,  valuable  in  every 
line  of  business  life.  It  may  be  further  stated 
that  the  man  who  attempts  to  evade  necessary 
labor  and  research  by  placing  his  dependence 
on  tips  or  charts,  or  the  opinions  of  others,  can- 
not hope  to  succeed.  The  gambling  idea  must 
be  put  out  of  the  question  entirely,  and  means 
sought  whereby  intelligent  opinions  may  be 
formed  by  both  inductive  and  deductive  rea- 
soning. 

In  preparing  this  work  the  temptation  to 
enter  more  extensively  into  fundamental  prin- 
ciples has  been  great.    It  would  be  impossible 


18         THE  CYCLES  OF  SPECULATION 

to  do  more  than  suggest  a  line  of  procedure  in 
a  single  volume,  and  only  the  most  elemental 
requisites  are  set  forth.  And  not  only  do  the 
prescribed  limits  of  this  volume  forbid  any  ex- 
haustive discussion,  but  such  discussion  is  un- 
necessary. On  every  subject  of  importance  we 
have  books  written  by  men  of  soberness  and 
judgment,  each  a  specialist  in  his  field.  A 
bibliography  has  been  appended  to  this  volume 
suggesting  such  works  as  are  considered  help- 
ful. In  this  bibliography  an  attempt  has  been 
made  to  choose  such  books  as  are  clear  and 
simple,  rather  than  those  which  are  profound. 
If  the  task  as  herein  outlined,  appears  for- 
midable, it  may  be  said  that  it  is  absolutely 
necessary,  and  not  so  difficult  as  may  appear. 
Before  the  student  has  entered  far  into  the  sub- 
ject, he  will  find  the  matter  interesting  and 
will  very  quickly  realize  that  the  well  grounded 
contentions  and  discussions  of  men  who  ex- 
amine and  diagnose  economical  questions  cor- 
rectly, are  of  more  value  than  the  combined 
tips,  guesses  and  poorly  based  opinions  of  all 
the  professional  speculators  and  gamblers 
from  one  end  of  Wall  Street  to  the  other.  This 
form  of  basic  knowledge  is  just  as  important 
to  the  active  trader  as  it  is  to  the  investor.  If 
he  can  correctly  judge  of  the  general  trend  of 
future  prices,  he  may  operate  safely  with  that 


INTRODUCTION  19 

trend  instead  of  floundering  around  helplessly 
in  a  slough  of  indecision,  or  possibly  working 
directly  against  the  current.  If,  for  example, 
he  has  good  solid  reasons  for  expecting  ulti- 
mately higher  prices,  he  will  not  be  disturbed 
by  temporary  reactions  and,  instead  of  being 
frightened  out  of  his  position  through  ignor- 
ance, he  will  take  advantage  of  such  reactions 
to  make  his  purchases  or  cheapen  his  holdings. 
Knowledge,  in  this  particular  line  as  in  all 
others,  is  the  foundation  of  successful  ventures. 


II 

The  Cycles  of  Speculation 

The  great  upward  and  downward  swings  of 
speculative  prices,  herein  referred  to  as  cycles, 
have  invariably  preceded  or  accompanied 
periods  of  business  inflation  or  depression. 
This  fact,  apparently  so  elemental,  is  often  dis- 
regarded by  that  very  large  class  of  specula- 
tors which  is  continually  looking  for  artificial 
and  unpregnant  explanations  of  price  changes. 
There  can  be  no  doubt  as  to  the  existence 
of  manipulation,  and,  in  rare  cases,  movements 
of  considerable  importance  may  be  traced  to 
this  source  alone ;  but  manipulation  consists,  in 
its  fullest  sense,  of  the  tactics  resorted  to  for 
the  purpose  of  liquidating  shares  in  anticipa- 
tion of  a  decline  which  the  long-distance  think- 
ers believe  to  be  inevitable;  or,  per  contra,  for 
the  accumulation  of  shares  prior  to  a  great  re- 
covery or  readjustment.  It  is  seldom  em- 
ployed as  a  positive  means  of  enhancing  or  de- 
pressing values.  In  fact,  to  do  either  by  mere 
manipulation  would  be  an  impossibility.  Every 
observer  of  great  speculative  movements  knows 

21 


22         THE  CYCLES  OF  SPECULATION 

that  at  the  highest  point  of  a  movement,  and 
during  the  first  half  of  a  decline  ever5rthing 
appears  roseate,  while  at  the  lowest  prices,  and 
during  the  first  half  of  an  advance,  the  reverse 
is  true. 

There  are  several  contributory  causes  which 
operate  to  produce  these  false  appearances. 
The  primary  cause  is  the  curtailed  perspective 
and  imperfect  logic  of  the  public  investor  or 
speculator.  The  most  difficult  thing  to  drill 
into  the  mind  of  the  unsophisticated  is  the 
fact  that  speculation  cannot  possibly  be 
successfully  based  on  appearances  which  are 
open  and  obvious.  Such  a  process  is  a  flat  con- 
tradiction of  the  word  itself.  It  is  unseen 
future  developments  or,  in  some  cases,  hidden 
and  submerged  present  truths  which  must  be 
consulted.  Yet  we  find  a  great  majority  of  the 
public  element  who  seek  riches  in  the  specula- 
tive arena,  constantly  harping  on  the  large  busi- 
ness of  certain  corporations,  and  the  excellent 
state  of  general  trade  as  a  reason  for  purchas- 
ing shares.  These  factors  have,  in  all  proba- 
bility, been  discounted  in  current  prices.  Gen- 
erally speaking,  the  present  is  of  no  more  use 
than  the  past  in  forming  opinions  of  future 
price  changes.  It  is  a  certainty  that  sales  of 
stocks  could  not  be  made  in  great  volume  to 
good   advantage   unless   everything   did   look 


THE  CYCLES  OF  SPECULATION  23 

rosy,  for  who  would  purchase  shares  at  high 
prices  if  the  future  appeared  threatening  or  un- 
propitious,  and  who  would  sell  holdings  in  the 
face  of  encouraging  and  inspiriting  prospects. 

This  brings  us  to  the  second  phase  of  the 
question — the  creation  of  false  appearances, 
which  is,  in  truth,  the  highest  form  of  manipu- 
lation. When  so-called  inside  selling  is  going 
on,  great  business  is  reported  by  railroad  and 
producing  corporations;  dividends  are  in- 
creased, and  public  expressions  of  confidence 
emanate  from  men  of  high  standing  in  the 
financial  world.  The  effect  of  all  this  expressed 
optimism  is,  market-wise,  of  a  negative  char- 
acter. When  it  is  most  prevalent  and  most  de- 
cisive, prices  halt  or  even  decline.  This  period 
and  action  represents  selling  at  the  only  time 
when  advantageous  selling  is  possible.  In  the 
main  the  truth  only  is  told  about  existent  con- 
ditions, possibly  about  the  near  future.  Noth- 
ing else  is  necessary;  but  nevertheless  the  sell- 
ers are  anticipating,  not  the  events  of  the  next 
week  or  the  next  month,  but  of  a  more  remote 
period  where  they  see  probabilities  in  regard  to 
which  a  discreet  silence  is  maintained. 

The  constantly  recurring  cycles  of  prices,  the 
alternate  inflation  and  depression,  must  there- 
fore be  traced  to  something  far  more  important 
than  the  grossly  exaggerated  potentiality  of 
mere  manipulation. 


24         THE  CYCLES  OF  SPECULATION 

Principal  Crises  of  the  Last  Century. 

That  crises  in  the  financial  world  have  oc- 
curred at  more  or  less  regular  periods  is  a  mat- 
ter of  history.  Since  the  beginning  of  the  nine- 
teenth century  ten  of  these  readjustments  have 
occurred.  In  1812,  after  ten  years  of  prosper- 
ous conditions  preceding  the  war  of  that  year, 
business  fell  off  materially.  The  real  panic, 
however,  occurred  in  1814.  Washington  was 
taken  by  the  British  on  August  24th,  1814,  and 
suspension  of  specie  payments  was  general  in 
the  following  two  weeks. 

In  1824,  the  protective  tariff  enactments  were 
followed  by  general  inflation  in  all  lines  of  busi- 
ness. Two  years  later,  in  1826,  a  general  de- 
pression occurred  with  many  failures.  The  de- 
pression at  this  period  was  even  greater  in  Eng- 
land than  in  the  United  States,  and  many 
writers  attribute  the  entire  trouble  to  European 
business  reverses,  but  it  is  probable  that  we 
had  been  living  beyond  our  means  and  that  this 
fact,  to  say  the  least,  aggravated  the  disturb- 
ance. 

In  1837,  after  six  years  of  good  times,  an- 
other crisis  occurred.  This  depression  was 
attributed  to  various  causes.  The  great  New 
York  fire  of  1835,  the  loss  of  charter  by  the 
United  States  Bank  in  1836,  and  the  calling  in 
of    $37,500,000    of    government    deposits    by 


CRISES  OF  THE  CENTURY  25 

President  Jackson,  are  all  given  due  consider- 
ation. The  actual  panic,  however,  did  not  ap- 
pear until  May  10,  1837.  All  the  banks  sus- 
pended specie  payments,  and  securities, — in 
fact  all  properties  of  whatever  kind — fell 
rapidly  in  value.  The  most  plausible  expla- 
nation of  this  crisis  is  overspeculation  in  land. 
The  other  evils  mentioned  might  easily  have 
been  rectified  by  the  recuperative  powers  of  a 
growing  country,  had  the  more  serious  element 
of  wild  inflation  been  absent. 

In  1848,  after  a  long  period  of  prosperity, 
broken  only  by  the  war  with  Mexico,  business 
inflation  and  overspeculation  again  brought 
about  the  logical  and  inevitable  result.  Europe 
also  had  been  over-speculating  again  and  a 
crisis  in  England  soon  extended  to  the  United 
States.  Liquidation  was  drastic  and  the  de- 
pression lasted  until  the  discovery  of  gold  in 
California  began  to  bear  fruit. 

In  1857,  one  of  the  most  serious,  as  well  as 
the  most  short-lived,  of  our  crises  occurred. 
Again  speculation  was  extreme;  December, 
1856,  marked  the  high  point  in  securities,  and 
prices  continued  to  sag  for  some  months;  but 
it  was  not  until  August,  1857,  that  a  panic  oc- 
curred. 

In  1864,  came  a  crash  in  speculative  prices 
following  tremendous  inflation.  Between  April, 
1864,  and  April,  1865,  leading  stocks  declined 


26         THE  CYCLES  OF  SPECULATION 

from  $50  to  $100  per  share.  As  the  inflation  of 
this  period  was  caused  largely  by  the  high 
prices  of  commodities  and  greatly  increased 
railroad  earnings  occasioned  by  the  events  of 
the  Civil  War,  most  writers  on  the  subject  do 
not  consider  it  in  their  theoretical  discussions 
of  crises. 

In  1872,  another  boom  was  on,  particularly 
in  Iron  and  Steel.  The  Chicago  and  Boston 
fires  had  not  been  as  effective  in  breaking  stock 
prices  as  might  have  been  expected.  Prices  of 
stocks  began  going  down  materially  in  April, 
1873,  and  in  fact  had  been  rather  "toppy"  dur- 
ing the  preceding  years.  This  panic,  like  most 
of  the  others,  was  preceded  by  enormous 
speculation  and  high  prices.  It  is  interesting 
to  note  that  while  stocks  were  declining,  gen- 
eral business  was  booming.  The  trained  minds 
of  Wall  Street  were  learning  to  discount  the 
future  at  longer  range  and  more  accurately. 
The  iron  and  steel  business  exceeded  all  former 
records  in  1873,  both  in  the  matter  of  normal 
price  and  actual  production. 

In  January,  1884,  numerous  failures  and  sus- 
pensions produced  a  panic  which  was  in  reality 
the  culmination  of  a  long  decline.  As  in  1872, 
this  panic  was  preceded  by  enormous  general 
business.  The  steel  and  iron  trade  again  broke 
all  records  in  1882,  and  other  lines  were  equally 
prosperous. 


CRISES  OF  THE  CENTURY  27 

In  1893,  the  period  of  prosperity  which  fol- 
lowed the  enactment  of  the  McKinley  bill  was 
rudely  broken.  Speculation  had  been  rampant, 
as  usual.  On  May  4th,  1893,  the  National 
Cordage  Company  went  into  the  hands  of  a 
receiver.  Only  a  year  prior  to  that  date,  this 
corporation  was  paying  12  %>  in  dividends  and 
the  stock  was  selling  well  above  par.  There 
were  many  badly  inflated  stocks  and  many 
rotten  spots  in  the  speculative  stock  markets. 
The  Distillers  and  Cattle  Feeders  shares  fell 
from  $70  to  nothing,  and  were  assessed  $20  per 
share.  The  aggregate  liabilities  of  business 
failures  in  1893  were  almost  $350,000,000,  over 
20%  greater  than  in  1892.  Banks  failed  right 
and  left,  and  several  leading  railroad  companies 
went  into  the  hands  of  receivers. 

In  1903,  another  period  of  depression  oc- 
curred. It  is  doubtful  if  this  period  can  be 
rightly  classed  with  the  other  crises  already 
mentioned,  for  it  was  more  in  the  nature  of  a 
drastic  but  orderly  retrenchment  than  a  panic, 
and  the  bull  stock  market  of  1902  was  again  in 
full  swing  early  in  1904. 

In  thus  briefly  detailing  the  crucial  points  of 
nineteenth  century  financial  affairs,  there  is  no 
intention  of  entering  an  economic  discussion, 
and  no  pretence  of  giving  anything  like  a  com- 
prehensive history  of  the  events  preceding  or 
following  their  recurrence.     The  subject  here 


28  THE  CYCLES  OF  SPECULATION 

discussed  is  speculation,  and  the  object  sought 
is  to  gain  knowledge  that  may  be  of  value  in 
forming  opinions  as  to  future  prices.  We  may 
gain  some  information  of  this  character  by 
analyzing  the  following  points: 

1 — Did  price  declines  in  stocks  precede,  ac- 
company, or  follow  panics,  crises,  or  general 
business  depression? 

2 — What  are  the  signs  which  usually  pre- 
cede such  periods? 

3 — What  are  the  salient  causes? 

A — Can  any  dependence  be  placed  in  the 
regularity  of  these  recurrences? 

On  the  first  head  it  will  be  found  that  in  all 
cases  the  top  of  the  stock  market  has  been 
reached  prior  to  the  actual  eruption  in  general 
business.  Stock  speculation  in  1814  and  1826 
was  not  of  great  volume  nor  importance,  and 
cannot  be  given  much  consideration. 

Beginning  with  the  panic  of  1837  we  find 
that  the  highest  prices  for  stocks  were  made  in 
October,  1836,  while  panic  conditions  did  not 
occur  until  May,  1837.  Preceding  the  panic  of 
August,  1857,  highest  prices  were  reached  in 
the  last  months  of  1856.  Highest  figures  were 
recorded  in  April,  1872,  just  one  year  prior  to 
the  panic  of  1873.  The  stock  market  antici- 
pated the  troubles  of  1884  by  17  months  of  de- 
clining prices.  In  January,  1892,  stocks  be- 
gan declining  and  continued  their  downward 
course  until  the  panic  of  1893  cleared  the  at- 


CRISES  OF  THE  CENTURY  29 

mosphere.  In  our  last  period  of  depression 
(1903)  stocks  had  reached  their  pinnacle  in 
September,  1902,  just  one  year  before  the  mar- 
ket turned  for  the  better. 

We  find  therefore  that  in  the  majority 
of  instances,  highest  prices  for  stocks  were 
reached  long  before  business  troubles  were 
openly  apparent.  This  action  represents  to  a 
certain  extent  the  selling  of  stocks  by  men 
who  were  wise  enough  to  foresee  trouble. 

Another  interesting  fact  in  regard  to  crises 
is  that  they  are  usually  preceded  by  record- 
breaking  business  in  all  directions.  As  iron 
and  steel  may  be  considered  the  best  barometer 
of  business  conditions,  the  following  tables  are 
instructive : 

PIG  IRON  PRODUCTION  IN  THE  UNITED  STATES 
SINCE  i860. 

Production 
Year  Tons 

i860 919,770 

1861 731,544 

1862 787,662 

1863 947,604 

1864  (Depression) 1,135,996 

1865 931,582 

1866 1,350,344 

1867 1,461,626 

1868 1,603,000 

1869 1,916,641 

1870 1 ,865,000 

1871 1,911,608 

1872 2,854,558 

1873  (Depression) 2,560,963 

1874 2,401 ,262 

1875 2,023,733 

1876 1,868,961 

1877 2,066,594 


30  THE  CYCLES  OF  SPECULATION 

Year  Tons 

1878 2.301. 215 

1879 2,741,853 

1880 3,835,151 

1881 4,144,254 

1882 4,623,323 

1883 4,595,510 

1884    (Depression) 4,097,868 

1885 4,044,526 

1886 5,683,329 

1887 6,417,148 

1888 6,489,738 

1889 7,603,642 

1890 9,202,703 

1891 8,279,870 

1892 9,157,000 

1893    (Depression) 7,124,502 

1894 6,657,088 

1895 9,446,308 

1896 8,623,127 

1897 9,652,860 

1898 11,773,934 

1899 13,620,703 

1900 13,789,243 

1901 15,878,354 

1902 17,821,307 

1903    (Depression) 18,009,252 

1904 16,497,033 

1905 22,992,380 

1906 25,307,191 

It  will  be  observed  that  the  high  record  of 
production  has  been  reached  just  prior  to  our 
greatest  periods  of  depression,  or  during  such 
periods. 

The  second  phase  of  the  question,  "what 
signs  usually  precede  such  periods?"  opens  a 
wide  field  for  the  student  of  speculative 
changes.  Some  inspiration  may  be  gained 
from  an  examination  of  the  two  points  already 
considered,  i.e.:  priority  of  price  movements 


CRISES  OF  THE  CENTURY  31 

and  business  inflation;  but  it  would  be  ex- 
tremely difficult  to  use  them  as  guides  unless 
many  other  factors  were  given  consideration. 
If  we  eliminate  the  element  of  periodicity,  any 
attempt  to  determine  the  turning  point  by  ex- 
amination of  advances  in  prices  of  stocks  or 
volume  of  production  and  consumption  of  com- 
modities is  futile.  Using  pig  iron  as  a  ba- 
rometer we  might,  after  production  has  gradu- 
ally increased  from  8,623,127  tons  in  1896,  to 
15,878,354  in  1901,  argue  that  a  considerable 
reaction  was  due  in  this  line,  but  we  would  be 
out  in  our  calculations  two  years  and  two  mil- 
lion tons.  Neither  can  we  accept  the  simple 
fact  of  a  decline,  or  the  beginning  of  a  decline 
in  iron  or  in  any  other  single  commodity  as  in- 
dicating lower  prices  for  stocks;  for  however 
accurate  iron  may  be  as  a  barometer  of  gen- 
eral business,  it  is  not  at  all  a  barometer  of  the 
stock  market.  It  is  practically  certain  that 
stock  prices  will  move  either  to  higher  or  lower 
prices  long  before  any  reason?  for  such  move- 
ments are  apparent  to  the  ordinary  observer. 
Future  stock  market  movements  are  largely 
deductive,  and  are  not  founded  upon  ordinary 
industrial  statistical  evidence. 

There  is,  however,  one  method  by  which 
some  light  may  be  thrown  upon  the  subject  of 
probable  movements.  A  careful  study  of  mone- 
tary conditions  and  expansion  of  credits  will 


32         THE  CYCLES  OF  SPECULATION 

frequently  reveal  dangers  not  apparent  in  any 
other  direction.  It  is  scarcely  necessary  to  say 
that  such  examination  must  not  be  confined  to 
one  quarter,  such  as  New  York  City ;  or  to  one 
country,  such  as  the  United  States.  A  com- 
prehensive view  of  the  world's  monetary  con- 
ditions will  be  necessary.  This  subject  is  dealt 
with  more  fully  in  another  chapter. 

There  is  much  difference  of  opinion  among 
writers  and  students  of  economics  as  to  the 
cause  of  depressions.  Bagehot  attributes  it  to 
the  fact  that,  "at  particular  times  a  great  many 
stupid  people  have  a  great  deal  of  stupid 
money."  This  writer  contends  that  occasion- 
ally money  accumulates  abnormally  and  craves 
an  investment  outlet.  To  use  his  own  words, 
"This  blind  capital  seeks  for  some  one  to  de- 
vour it,  and  there  is  plethora ;  it  finds  some  one, 
and  there  is  speculation;  it  is  devoured,  and 
there  is  a  panic."  Horace  White  attributes 
panics  to  over-speculation.  Bonamy  Price 
says:  "A  vast  outlay  in  new  enterprises  in- 
volving a  large  consumption  of  food  and  ma- 
terials, whether  in  the  way  of  pure  waste  or 
temporary  unproductiveness,  ought  always  to 
suggest  a  feeling  of  danger.  This  excess  occurs 
in  seasons  of  prosperity."  John  B.  Clark  holds 
that  it  is  due  to  an  excess  of  production ;  or  an 
excess  of  production  in  one  line  with  a  de- 
ficiency in  others.     Leone  Levi:   "The  main 


CRISES  OF  THE  CENTURY  33 

cause  for  the  occurrence  of  crises  is  the  sudden 
realization  of  an  insufficiency  of  capital  to  meet 
present  demands."  Thorold  Rogers  says :  "The 
cause  exists  in  the  function  of  exchange ;  in  the 
expectation  of  unreasonable  profits  and  in  in- 
correct calculation."  It  was  the  late  Henry 
George's  theory  that  depressions  are  brought 
about  by  higher  prices  of  land.  He  held  that 
workers  thrive  as  they  have  easy  access  to 
natural  opportunities  for  production,  and  are 
impoverished  as  they  are  deprived  of  such 
opportunities.  All  periods  of  speculation  and 
inflation  end  in  higher  land  values.  Landlords 
call  for  a  larger  percentage  of  the  product  than 
workers  can  afford  to  pay,  and  both  labor  and 
capital  become  idle  until  there  is  a  readjust- 
ment. Prof.  W.  S.  Jevons,  and  a  host  of  others, 
attribute  crises  to  sun  spots  and  their  effects 
on  harvests.  And  so  on  through  a  long  line 
of  theories. 

The  consensus  of  opinion  appears  to  favor 
the  theory  of  over-speculation,  whether  in 
realty,  commodities,  or  the  shares  of  corpora- 
tions, and  this  leads  up  to  the  question  of 
periodicity.  That  there  has  been  a  recurrence 
of  these  troubles  about  once  in  ten  years  is  not 
a  debatable  question.  Nevertheless,  many 
thinkers  scout  the  idea  of  this  repetition  at 
marked  periods  being  other  than  fortuitous. 
As  prominent  a  student  as  Thorold  Rogers,  for 


34         THE  CYCLES  OF  SPECULATION 

example,  ridicules  the  theory  of  periodicity. 
Many  hopeful  people  believe  that  in  time  we 
will  find  means  to  avoid  these  bad  spots;  that 
the  United  States  is  a  young  and  enthusiastic 
country,  and  that  we  will  gradually  sober  down 
in  both  methods  and  effects.  But  against  this 
theory  lies  the  cold  fact  that  these  cycles  have 
occurred  with  as  charming  regularity  in  France 
and  England  as  they  have  in  our  own  country, 
which  would  indicate  that  age  and  seasoning 
does  not  produce  any  appreciable  improve- 
ment. 

It  is  probable  that  the  most  acceptable  theory 
as  to  the  causes  of  periodicity  is  the  psycho- 
logical contention.  Human  nature  is  much  the 
same  throughout  the  civilized  world.  We  suf- 
fer from  a  panic  and  a  period  of  depression, 
and  we  grow  wary  and  conservative.  This 
course  results  in  sound  methods  and  accumu- 
lation. The  business  structure  rests  on  a  firmer 
foundation.  Gradually  the  hard  lessons  of  the 
past  are  forgotten  by  the  older  generation,  and 
are  entirely  unlearned  by  the  new  business 
generation,  all  of  whom  are  optimists.  Again 
we  expand  our  enterprises,  again  fortune  favors 
us;  the  appetite  for  gold  grows  greater  as 
wealth  accumulates ;  men  who  were  economical 
and  satisfied  on  modest  incomes  now  live  ex- 
travagantly, and  some  of  them  dream  of  mil- 
lions.   Capital  is  spread  out  thinly.    Story  after 


CRISES  OF  THE  CENTURY  35 

story  is  erected  on  one  foundation,  and  that 
foundation,  sound  enough  at  first,  eventually 
gives  way.  Then  we  must  begin  our  careful 
building  once  more.  The  ten  year  periods, 
therefore,  may  represent  with  more  or  less  ac- 
curacy, the  lapse  of  time  between  wisdom  and 
folly, — the  yard-stick  of  human  intellect  and 
experience. 

Many  of  the  writers  on  this  subject  seem  to 
strive  for  tangible  reasons  for  each  depression. 
They  dive  into  the  subject  for  a  cause  and 
emerge  with  an  effect,  or  a  handful  of  effects. 
For  example,  the  depression  following  1893 
was  not  caused  by  the  failures  of  banks  and 
other  business  institutions,  but  the  failures 
were  caused  by  the  depression.  It  matters  not 
that  the  failures  ante-dated  the  bad  conditions. 
Again,  the  depression  itself  was  produced  by 
prior  inflation.  It  was  the  illness  after  over- 
stimulation. And  so,  in  turn,  we  can  ask  what 
caused  the  inflation;  and  the  answer  is  "Human 
greed  and  human  folly."  This  last  analysis 
brings  us  around  in  a  circle  to  the  original 
theory  of  a  psychological  cause. 

It  is  submitted  that  a  dependence  on  period- 
icity of  any  kind,  either  in  the  ten  year  cycles  or 
in  year-to-year  events  is  fraught  with  danger 
and  cannot  be  adopted  by  the  speculator.  It  is 
chart-playing  pure  and  simple,  and  the  man 
who  disposes  of  his  stocks  for  no  better  reason 


36         THE  CYCLES  OF  SPECULATION 

than  that  a  depression  appeared  ten  years  ago, 
is  liable  to  find  himself  in  the  position  of  the 
chart-enthusiast,  who,  after  tracing  a  marked 
uniformity  in  movements  for  a  period  of  years, 
runs  into  reverses  and  loses  all. 

It  is  not  meant  to  say  that  a  knowledge  of 
the  past  is  without  value.  Inductive  reasoning 
is  almost  as  important  as  deductive  reasoning, 
when  properly  employed  and  applied.  If  we 
scrutinize  the  history  of  past  crises  and  great 
movements  with  a  view  to  determining  the 
salient  causes  therefor,  a  great  deal  has  been 
gained,  for  we  may  apply  this  knowledge  to 
existent  elements  lying  parallel  to  those  which 
caused  trouble  in  the  past,  and  thus  decide 
what  is  probable  in  the  future.  If,  on  the  other 
hand,  we  place  dependence  on  mere  repetition, 
we  gain  nothing  in  education  and  stand  in  con- 
stant danger. 

It  may  be  contended  that  the  active  specu- 
lator has  little  to  do  with  ten  year  cycles  or 
their  causes,  but  this  is  not  the  case.  A  correct 
understanding  of  the  reasons  for  the  great 
cycles  will  simplify  the  study  of  smaller  inter- 
mediate movements.  Much  knowledge  appli- 
cable to  year-to-year  movements  will  be  gained. 
Monetary  troubles,  for  example,  occur  almost 
annually,  and  their  effects  on  market  move- 
ments are  usually,  (not  always),  similar  to 
those  of  more  widely  separated  periods,  but,  of 
course,  in  a  lesser  degree. 


ra 

The  Gold  Supply 

It  may  be  stated  without  hesitation  that  the 
effect  of  the  increasing  supply  of  gold  upon 
prices  of  all  bonds,  shares,  or  commodities 
which  may  be  classed  as  speculative,  is  more 
decided  and  certain  in  its  operation  than  any 
other  single  factor.  The  process  of  readjust- 
ment due  to  this  cause  would  be  slow  and 
regular  if  the  principles  at  issue  were  uni- 
versally and  clearly  understood.  Not  being 
generally  recognized,  however,  the  changes 
wrought  by  what  is  naturally  an  insidious  fac- 
tor are,  at  times,  spasmodic  and  feverish.  It 
is  a  remarkable  fact  that  whenever  a  revolu- 
tion occurs  in  any  economic  or  financial  pro- 
cess which  is,  by  its  nature,  concealed  or  re- 
condite, its  existence  and  influence  are  dis- 
covered by  a  number  of  students  simultane- 
ously but  independently.  Important  reversions 
or  modifications  may  be  submerged  for  a  long 
period,  and  suddenly  light  is  offered  from  all 
parts  of  the  thinking  world.  It  is  probable  that 
this  intellectual  phenomenon  extends  to,  or  is 


37 


39        THE  CYCLES  OF  SPECULATION 

communicated  to  the  financial  world,  and  that 
marked  and  drastic  changes  in  the  affected 
quarters  represent  a  belated  recognition  of 
forces  hitherto  unknown,  and  the  readjustment 
of  affairs  by  those  who  see  first  and  furthest. 
That  the  operations  of  this  minority  will  be 
important  goes  without  saying.  The  faculty 
to  grasp  fully  and  quickly  anything  salient 
bearing  on  financial  affairs  is  the  ground-work 
of  riches  and  consequently  the  trained  minds  of 
great  holders  of  shares  or  commodities  will  re- 
spond most  readily  to  sound  basic  arguments, 
and  the  greatest  holders  can  often  make  of  their 
knowledge  a  two-edged  sword.  For  example, 
certain  large  holders  of  bonds,  recognizing  the 
fact  that  increasing  gold  production  means 
higher  interest  rates,  and  consequently  lower 
prices  for  bonds,  would  be  able  to  dispose  of 
bonds  to  advantage  because  of  the  apparent 
general  prosperity  growing  out  of  this  same 
production  of  gold.  It  may  be  assumed  that  in 
pointing-  out  in,.intervie\ys,"etc.,  this  reign  of 
prosperity,  the  gentlemen  in  question  would 
modestly  omit  to  mention  that  the  same  in- 
fluences which  were  causing  high  prices  and 
much  business  in  some  quarters,  were  working 
damage  in  others. 

Something  of  this  kind  has  been  going  on  in 
otir  bond  and  stoclr  markets  of  late.  The  in- 
evitable influence  of  gold  on  prices  has  made 


THE  GOLD  SUPPLY  39 

itself  slowly  felt  for  a  long  period,  but  it  is  only 
in  the  last  year  that  a  considerable  number  of 
individuals  whose  operations  are  of  importance 
in  the  financial  world  have  come  to  recognize 
how  powerful  this  influence  is.  Price  changes 
in  divers  securities  and  commodities  hitherto 
unaccounted  for,  or  attributed  to  wrong  in- 
fluences, have  suddenly  been  explained  to  a 
number  of  important  financiers,  and  a  correct 
understanding  of  the  problem  has  undoubtedly 
resulted  in  radical  readjustments  in  some  quar- 
ters. With  that  pertinacity  in  error  which 
seems  to  distinguish  the  ordinary  speculator, 
he  has,  however,  gone  on  attributing  these  pro- 
cesses of  equilibration  to  causes  which  have 
only  a  limited  bearing  on  the  case.  The  recent 
heavy  decline  in  bonds  and  stocks,  for  exam- 
ple, was  popularly  ascribed  to  political  and 
legislative  action  against  railroads.  Scai:city 
of  money  was  given  second  place  in  these  de- 
ductions, and  gold  production  third  place,  or 
no  place  at  all.  If  we  reverse  this  order  of 
importance  and  give  gold  production  first 
place,  monetary  affairs  second  place,  and  polit- 
ical affairs  third  place,  we  are  nearer  the  truth. 
It  looks  a  little  ridiculous  that  the  scope  of 
intelligent  perspective  should  be  blocked  by 
three  thousand  miles  of  water,  and  that  the 
unthinking  majority  who  ascribe  our  decline 
in  bonds  to  local  politics  should  have  failed  to 


40        THE  CYCLES  OF  SPECULATION 

recognize  so  potent  a  fact  as  that  the  decline 
was  world-wide;  but  such  is  the  case.  The 
readjustment  in  bonds  was  due .  to  excessive 
over-production  of  gold,  and  it  may  be  safely 
assumed  that  so  long  as  this  over-production 
continues  to  increase  rapidly,  bonds  will  con- 
tinue low  in  price  or,  what  amounts  to  the 
same  thing,  interest  rates  will  remain  high. 

As  to  the  importance  of  a  correct  under- 
standing on  this  subject  of  gold  supply  and  its 
influence  on  prices,  I  quote  from  Mr.  Byron 
W.  Holt's  book  "The  Gold  Supply  and  Pros- 
perity," which,  I  may  add,  is  used  as  the  text 
book  for  this  chapter.    Mr.  Holt  says: 

"This  is  the  great  problem  that  now  confronts  the 
financial  world  and  demands  solution  of  every  in- 
vestor. Not  to  solve  it  may  mean-  great  loss  and 
possible  failure.  To  solve  it  means  success  and 
greatly  enhanced  wealth  for  all  who  now  have  either 
a  fair  share  of  this  world's  goods  or  who  have  credit 
and  can  intelligently  go  in  debt  for  a  largfe  amount." 

As  speculation  or  investment-speculation,  as 
defined  in  the  introduction  to  this  book,  are  the 
subjects  under  discussion  it  is  the  intention  to 
take  up,  in  turn,  such  points  as  bear  particu- 
larly upon  price  changes  of  speculative  shares 
and  commodities  influenced  by  our  increasing 
supply  of  gold.  The  main  points  to  be  con- 
sidered are  as  follows: 

1— The  effect  upon  bonds  and  preferred 
stocks  having  a  fixed  rate  of  income.. 


THE  GOLD  SUPPLY  41 

2 — The  effect  upon  common  stocks  of  rail- 
road corporations. 

3 — The  effect  upon  stocks  of  industrial  cor- 
porations. 

4 — The  effect  upon  speculative  commodities 
—wheat,  corn,  oats,  cotton,  etc. 

For  the'  purpose  of  argument  it  will  be  as- 
sumed in  this  discussion  that  our  supply  of 
gold  is  rapidly  increasing.  We  know  that  such 
has  been  the  case  in  recent  years,  and  it  is  the 
opinion  of  most  students  that  this  increase  may 
be  confidently  expected  to  continue.  To  quote 
again  from  the  work  already  mentioned : 

"Both  the  output  and  supply  of  gold  are  likely  to 
increase  for  many  years. 

"While  the  future  output  of  gold  is,  of  necessity, 
unknown  and  uncertain,  there  is  great  unanimity  of 
opinion,  among  mining  experts,  on  this  point.  It 
appears  to  be  generally  recognized  that,  during  the 
last  twenty  years,  the  industry  of  gold  mining,  or 
rather  of  gold  production,  has  been  established  on  a 
very  different  and  much  more  certain  basis  than  any 
previously  existing.  No  longer  is  the  output  of  gold 
(dependent  mainly,  or  even  largely,  upon  placer  min- 
ing and  the  chance  finds  of  'free'  gold.  The  sup- 
ply of  gold,  in  rock,  sand,  clay,  and  water,  being  in- 
exhaustible, it  is  now  possible,  by  machinery  and 
metallurgical  processes,  to  extract  gold,  in  paying 
quantities,  from  many  forms  of  these  vast  store- 
houses. To  such  an  extent  is  this  true  that  the 
future  supply  of  gold  is  even  more  secure  than  is 
that  of  coal,  iron,  lumber,  wheat  or  cotton, 

"Even  if  prospecting  were  to  stop  and  attention 


42        THE  CYCLES  OF  SPECULATION 

were  to  be  devoted  only  to  the  gold  mines  arid 
bodies  already  discovered,  and  geologically  in  sight, 
it  is  probable  that  the  output  of  gold  would  continue 
to  increase  for  many  years.  As  Mr.  Selwyn-Brown, 
a  gold  mining  expert,  tells  us  in  his  very  interesting 
article,  'as  the  rich  surface  deposits  are  being 
vi^orked  out,  improvements  in  mining  and  metallur- 
gical processes  are  enabling  poorer  and  poorer  de- 
posits to  be  worked.'  That  is,  improvements  in 
'stamp  mills,*  cyanide  mills,  dredging  machines  and 
other  gold  extracting  apparatus  and  processes  are 
being  made  so  rapidly  that  it  is,  every  year,  becom- 
ing profitable  to  work  lower  and  lower  grades  of 
ore,  sand  and  earth.  As  the  grade  declines  the 
quantity  in  sight  increases  rapidly.  In  fact  there 
are  almost  literally  mountains  of  lo^  grade  gold  ore 
that  can  even  now  be  worked  profitably.  Some  of 
the  largest,  most  productive  and  most  profitable 
mines  of  today  contain  ore  averaging  less  than  $v^ 
and,  in  some  instances,  only  $2  of  gold  per  ton, 

"The  supply  of  such  ore  being  inexhaustible  the 
output  depends  upon  the  number  and  size  of  the 
mills  employed  to  extract  the  gold.  It  is  reason- 
ably certain  that,  for  years  to  come,  the  improve- 
ments in  methods  and  processes  of  mining  will 
more  than  keep  pace  with  both  the  decline  in  the 
quality  of  the  ore  and  the  increase  in  the  cost  of, 
mining  due  to  rising  prices  and  wages^  occasioned 
by  the  depreciation  of  gold. 

"In  view  of  all  the  facts,  Mr.  Selwyfi-Brown's 
conclusion  that  'a  progressive  increase  each  yeai^ 
may  confidently  be  expected*  is  couservative.  This 
conclusion,  is  almost  a  certainty,  The  uncertainty 
lies  in  the  possibility,  if  not  probability,  either  of 
discovering  many  important  new  mines  in  the  prac- 
tically unexplored  parts  of  every  continent,  or  of 


THE  GOLD  SUPPLY  ^ 

making  improvements  that  will  radically  reduce  the 
cost  of  extracting  gold.  In  either  case  the  increase 
in  the  output  of  gold  might  be  not  simply  arithmet- 
ically but  geometrically  progressive." 

Admitting  that  the  question  of  gold  produc- 
tion is  debatable,  it  remains  for  the  future  to 
develop  any  radical  change,  and  it  will  be 
necessary  for  the  student  to  decide  this  point 
for  himself  either  by  the  light  of  facts  as  yet 
not  established,  or  by  accepting  theories  as  yet 
not  convincingly  erected.  If  a  change  occurs, 
or  may  reasonably  be  expected,  an  understand- 
ing of  the  subject  from  the  positive  side  of  the 
question  loses  none  of  its  value.  The  prin- 
ciples involved  could  be  as  successfully  applied 
in  reading  the  probable  future  by  modifying 
or  reversing  effects,  and  reconciling  them  to  a 
modification  or  reversal  in  the  cause.  If,  for 
example,  we  accept  the  theory  that  increased 
gold  production  means  advancing  commodity 
prices,  and  find  reason  later  to  believe  that  gold 
production  will  cease  to  maintain  its  ratio  of 
increase,  we  may  alter  our  views  accordingly 
so  far  as  this  single  influence  is  concerned. 

1 — The  effect  of  the  increasing  gold  produc- 
tion on  bonds  and  preferred  stocks  having  a 
fixed  rate  of  income. 

In  this  division  of  the  question  the  crux  of 
the  whole  matter  is  interest  on  money.  The 
question  might,  in  fact,  be  stated  thus :  "What 


44        THE  CYCLES  OF  SPECULATION 

is  the  effect  of  increasing  gbia  supply  on 
money  interest  rates?"  and  having  solved  that 
problem,  the  original  inquiry  is  answered. 

To  reach  a  reasonable  solution  we  must  first 
examine  the  effect  of  an  unduly  increasing  sup- 
ply of  gold  on  commodity  prices.  Over-pro- 
duction in  any  quarter  inevitably  leads  to  lower 
prices.  Gold  being  a  fixed  standard  cannot  de- 
cline in  figures,  but  it  does  so  in  fact.  That  is 
to  say,  the  flexible  prices  of  things  which  gold 
will  buy  rise  to  fill  the  gap.  Thus,  since  1896, 
prices  of  commodities  have  risen  50%.  The 
man  who  loaned  money  ten  years  ago  finds  its 
purchasing  power  impaired  33  1-3%,  when  it  is 
returned  to  him  today,  for  the  reason  that  com- 
modity prices  having  advanced  50%  in  the  in- 
terim, his  dollar  will  now  buy  only  66  2-3% 
of  what  it  would  buy  in  1897.  This  impairment 
6i  principal  will  be  covered,  in  part  at  least,  by 
interest  rates.  This  effect,  if  not  recognized 
and  arbitrary  would  adjust  itself  automatically, 
regardless  of  whether  or  not  investors  recog- 
nize the  influence  of  changing  values  of  gold, 
for  moriey,  finding  higher  returns  in  other  quar- 
ters, would  speedily  desert  the  long-term, 
fixed-interest  investment  field,  and  prices  of 
such  securities  would  decline  through  lack  of 
demand. 

On  the  subject  of  interest  rates  Mr.  Holt 
says: 


THE  GOLD  SUPPLY  4$ 

"But  there  is  another  reason  why  interest  rate8 
should  be  high  when  prices  are  rising.  When 
money  is  shrinking  in  value  interest  rates  should  be 
high  to  make  up,  or  partly  make  up,  the  losses  on 
the  principals  of  loans.  To  illustrate:  Suppose  that 
prices  are  rising  10%  a  year.  This  means  that  the 
purchasing  power  of  money  is  declining  about  107o 
a  year.  Suppose,  then,  that  $100  were  loaned  for 
one  year  at  57o.  At  the  end  of  the  year  the  lender 
would  have  $105;  but  with  this  $105  he  could  buy 
only  about  as  much  as  he  could  have  bought  with 
$95,  at  the  beginning  of  the  year.  In  reality,  he  has 
received  no  interest  at  all  but  has,  instead,  paid  $5 
to  the  man  for  holding  his  $100.  The  man  with 
money  to  loan  cannot  afford  to  do  business  in  this 
way.  He  is  usually  as  wise  as  are  his  neighbors, 
and  fully  as  able  to  protect  his  own  interests  and  to 
get  all  his  money  is  worth,  either  by  buying  real 
property,  investing  in  bonds  and  stock  or  by  loaning 
on  notes  or  on  call." 

In  submitting  the  above  contentions  it  must 
be  fairly  stated  that  there  is  some  diversity  of 
opinion  as  to  the  effects  of  gold  on  interest 
rates.  A  few  writers  demur  to  the  theory; 
others  hold  that  the  effect  is  nil,  and  one  or  two 
openly  adopt  the  negative  side  of  the  discus- 
sion, and  state  that  more  money  means  lower 
rates  of  interest.  The  majority  of  recent  in- 
vestigators, however,  appear  to  be  accepting 
the  theory  as  given  herein,  and  it  may  be 
added  that  prices  of  the  class  of  securities 
considered  have  borne  out  the  hypothesis  faith- 
fully, and  that  the  minority  have  failed  to  offer 


46         THE  CYCLES  OF  SPECULATION 

convincing  explanations  of  this  readjustment. 
It  will  not  do  to  point  to  the  fact  that  money 
has  been  fully  employed  in  constructive  rather 
than  investment  fields  of  late ;  for  while  this  is 
true  enough,  it  does  not  explain  why  gilt-edged 
bonds  such  as  British  Consols  have  declined  in 
value,  while  stocks  and  shares  which  did  not 
bear  the  onus  of  circumscribed  returns  have 
advanced.  There  are,  of  course,  contributory 
causes:  the  Labor-Socialistic  Government  in 
England  no  doubt  affects  the  prices  of  consols, 
but  this  influence  is  specific,  and  loses  most  of 
its  force  when  we  consider  that  not  only  these 
particular  securities,  but  practically  all  others 
of  their  class  the  world  over  have  suffered  a 
radical  decline.  In  other  words,  interest  rates 
have  grown  comprehensively  higher.  The 
theory  appears  sound,  is  borne  out  by  events, 
and  mere  denial  does  not  weaken  it.  It 
may  well  be  accepted  until  its  opponents  suc- 
ceed in  giving  us  something  more  convincing 
in  its  place. 

In  support  of  the  theory,  M>.  Holt  repro- 
duces the  following  table  of  British  bonds  from 
Moody's  Magazine  for  October,  1906. 

PRICES  OF  BRITISH  INVESTMENT  B0N15S. 

%        1906      1905      1904     1896 
British  Consols .. .     2J        86J         89J        88J     *ii3l 

Met.  Consols 3I       102         104         104^       128? 

London  County. . .     3  88J        94J        93        128] 


THE  GOLD  SUPPLY  47 

%  1906  1905  1904  1896 

Leeds 4  108  109  iii^  1305 

Liverpool 3^  107  109  109  i44i 

Manchester 4  123  128J  124I  159 

New  South  Wales.  3^  looj  100           96  112^ 

Queensland 3^  99i         99           96  mi 

Canada 3  $8i  looj         97  107I 

Cape 3i  97           98           95  120 

Lon.  &  N.  Western  3  93           96           95  124! 

Midland zj  76          79          78  U24I 

Great  Western 4  123  127  123J  164 

Average 3.3      X00.2      101.8      loo.g      128.4 

*Then2X^.     t Then  3%. 

"Thus/'  comments  the  writer,  "these  13  British 
bonds,  supposedly  the  safest  and  least  speculative 
of  all  securities,  have  declined  an  average  of  over 
28  points  in  ten  years.  Considering  incomes  and 
present  prices,  the  unfortunate  investors  in  these 
bonds  have  not  only  received  less  than  1%  on  their 
investments,  during  the  last  ten  years,  but,  should 
they  sell  their  bonds,  they  would  find  that  the  pro- 
ceeds have  lost  30%  of  the  purchasing  power  of  a 
similar  amount  ten  years  ago.  Altogether,  they 
have  suffered  a  net  loss,  over  incomes,  of  more  than 
20%,  or  over  2%;  a  year." 

There  are  other  economic  influences  affect- 
ing interest  tates  through  gold  supply,  but  the 
one  given  appears  to  the  writer  the  most  di- 
rect and  forcible  when  applied  to  readjustment 
of  prices  to  income. 

In  weighing  the  influence  of  increasing  gold 
production  and  its  effect  upon  interest  rates 
through  the  advancing  prices  of  commodities, 
the  student  is  liable  to  fall  into  one  grave  error. 


48         THE  CYCLES  OF  SPECULATION 

He  may  perhaps  jump  to  the  conclusion  that 
gradually  advancing  prices  of  commodities 
mean  gradually  advancing  rates  of  interest. 
This  is  not  at  all  the  case.  A  sustained  ratio 
of  advance  means  sustained  high  rates  of  in- 
terest— nothing  more.  In  order  to  make  this 
clear  let  us  go  back  to  the  original  principle. 

Increasing  prices  for  commodities  mean  an 
impairment  of  the  purchasing  power  of  money. 
If  the  purchasing  power  of  money  is  impaired 
2^0  per  annum  through  increasing  prices  of 
commodities,  and  the  normal  rate  of  interest  is 
4%,  we  can  cover  the  deficiency  by  making  the 
interest  rate  6%  and  leaving  it  there  as  long 
as  this  ratio  of  impairment  is  maintained. 
In  other  words  the  man  who  loans  $1,000  at 
6%  loses  $20.00  per  annum  in  the  impairment 
of  capital  and  receives  normal  interest  of  $40.00 
per  annum  and  $20  extra  to  cover  his  loss  in 
capital.  Strictly  speaking  the  extra  2%  is  not 
interest  at  all,  but  an  amortization  payment.  It 
matters  not  how  high  prices  ultimately  go,  he 
receives  each  year  a  bonus  sufficient  to  cover 
his  loss  in  capital,  and  the  interest  rate  re- 
mains 6%. 

Therefore,  if  prices  of  commodities  advanced 
for  ten  years  and  then  ceased  to  advance,  but 
were  maintained  at  the  highest  figures  reached, 
interest  rates  would  fall  because  there  would 
be  no  further  impairment  of  capital,  and  what 


THE  G0L15  SUPPITS^  49 

'was  formerly  amortization,  would  become 
usury.  On  the  other  hand,  if  a  new  ratio  of 
increase  should  occur  in  commodity  prices 
and  they  should  advance  4%  per  annum,  inter- 
est rates  would,  if  fully  adjusted,  reach 
8% — 4%  for  normal  interest,  and  4%  for  im- 
pairment of  capital. 

2 — The  effect  upon  Common  Stocks  of  Rail- 
road Corporations. 

Here  the  effect  of  high  interest  rates  is,  or 
in  time  may  be,  offset  by  returns  in  the  form 
of  dividends,  undivided  profits,  improvement  of 
property,  or  the  fact  that  income  is  not  limited. 
But  there  is  another  trouble,  and  a  serious  one, 
for  which  the  gold  supply  is  responsible. 

If  the  increasing  supply  of  gold  is  responsible 
for  higher  commodity  prices  it  must  be  at  once 
apparent  that  the  building,  equipment  and 
maintenance  of  railway  properties  costs  more 
and  more  as  all  commodities,  including  labor, 
advance  in  price.  This  would  be  all  right  if 
the  selling  commodity,  i.  e. :  transportation,  also 
advanced  proportionately  in  price;  but  it  is  so 
difficult  to  override  popular  prejudice  and 
widespread  misunderstanding  on  this  point, 
that  we  find  continued  agitation  and  legislation 
not  only  against  advancing  rates,  but  with  a 
view  to  reducing  those  which  already  obtain. 
There  must,  of  course,  be  a  limit  to  this  thing, 


50         THE  CYCLES  OF  SPECULATION 

and  if  the  cost  of  production  continues  to  in- 
crease, the  railroads  must  be  permitted  to  de- 
mand higher  prices  for  transportation.  Other- 
wise a  point  would  finally  be  reached  where 
.every  railroad  in  the  country  would  be  forced 
into  bankruptcy.  The  great  danger  lies  in  a 
belated  assimilation  of  this  truth  by  the 
masses,  and  too  much  demagoguery  on  the  part 
of  politicians  who  do  understand,  but,  being 
politicians,  prefer  to  reflect  the  views  of  a  ma- 
jority of  constituents,  rather  than  to  enter  a 
campaign  of  proselyting.  That  evils  have 
been  fostered  and  wrongs  committed  by  emi- 
nent railroad  financiers  is  certain;  but  there  is 
considerable  confusion  of  ideas  on  this  head. 
Over-capitalization,  illegal  combinations,  man- 
ipulation of  funds  for  private  gain,  .and  the 
swelling  of  dividends  for  stock-jobbing  pur- 
poses, when  the  funds  so  distributed  should 
have  gone  into  improvements  or  surplus,  have 
all  played  their  part  in  arousing  the  wrath  and 
indignation  of  the  great  majority,  and  they  are, 
as  a  class,  prone  to  jump  to  the  conclusion  that 
any  and  every  railroad  corporation  is  charging 
unduly  high  rates  for  its  services,  and  making 
exorbitant  returns  on  invested  capital.  This 
has,  no  doubt,  been  more  or  less  true  in  the 
past  in  certain  cases  where  extremely  high 
rates  were  made,  and  the  apparent  returns  on 
money  attenuated  by  over-capitalization;  but 


THE  GOLD   SUPPLY  Si 

this  evil  is  gradually  decreasing,  and  the  real 
fight  is,  pr  should  be,  against  these  abuses. 
The  railroads  are  suffering  for  the  sins  of  the 
past,  and  may  suffer  still  further ;  but  the  time 
is  not  far  distant  when,  unless  conditions 
change  radically,  the  railroads  must  be  allowed 
more  latitude  in  the  adjustment  of  rates. 

The  prevalent  opinion,  that  needed  reforms 
which  strike  at  the  root  of  the  evils  mentioned 
above  is  a  bear  argument,  is  another  popular 
fallacy.  Such  reforms  intelligently  conceived, 
and  unswervingly  carried  out,  are  all  in  favor 
of  the  small  shareholder.  If  laws  can  be  en- 
acted which  will  prevent  individual  interests 
from  plundering  or  misusing  the  funds  of  cor- 
porations, and  which  will  compel  these  corpo- 
rations to  issue  reports  and  statements  which 
are  not  so  involved  and  complex  as  to  be  be- 
yond Ihe  ordinary  comprehension,  the  small 
holder  or  investor  will  have  a  better  show. 
But,  having  cured  these  evils,  no  laws  can  pos- 
sibly endure  which  contemplate  curtailing  fair 
returns  on  money,  and  fair  profits  'through 
natural  enhancement  in  values. 

But,  however  fair  or  cheering  this  view  may 
appear,  the  fact  remains  that  it  will  be  slow  in 
its  acceptance  and  slower  in  its  operation.  We 
may  therefore  summarize  the  situation  thus. 
Increasing  production  of  gold  brings  about  in- 
creasing cost  of  operation,  and  so  long  as  cost 


52         THE  CYCLES  OF  SPECULATION 

of  operation  is  advanced  with  no  corresponding 
advance  in  selling  price  of  transportation,  the 
ratio  of  profits  will  gradually  decrease  until  a 
vanishing  point  is  reached. 

In  the  last  analysis,  a  probable  tardy  and  re- 
luctant recognition  of  the  true  status  of  the 
case  warrants  the  belief  that  for  the  near  fu- 
ture, the  railroads  have  a  hard  time  ahead  of 
them,  and  that  so  far  as  this  single  important 
influence  is  concerned,  it  is  decidedly  a  bearish 
factor. 

3 — The  effect  upon  stocks  of  industrial  cor- 
porations. 


Here  we  have  a  different  proposition.  Rising 
prices  for  commodities  do  not  interfere  with 
the  earning  power  of  corporations  which  pro- 
duce and  sell  commodities,  the  prices  of  which 
are  not  limited  by  law.  In  fact  these  corpora- 
tions are,  in  many  cases,  gainers  by  this  in- 
fluence which  tends  to  advance  prices,  not  only* 
of  what  they  buy,  but  of  what  they  sell.  It 
may  be  added,  parenthetically,  that  railroad 
companies  which  own  valuable  coal  lands,  etc., 
find  the  bad  influences  already  discussed  par- 
tially offset  by  the  gain  from  such  holdings. 
The  railroad  company,  however,  may  be  con- 
sidered as  pre-eminently  a  seller  of  transpor- 
tation and  has  been  so  regarded  herein. 

The  industrial  corporations  whose  products 


THE  GOLD   SUPPLY  63 

are  subject  to  regulation  by  law,  such  as  gas 
and  electric  lighting  companies,  are  subject  to 
practically  the  same  influences  as  those  which 
operate  against  the  prices  of  railroad  stocks. 
Their  cost  of  production  advances  easily  and 
inevitably,  and  the  selling  price  remains  fixed, 
or  advances  with  difficulty  and  under  protest. 

4 — The  effect  on  speculative  commodities — 

Wheat,  Corn,  Oats,  Cotton,  etc. 

This  phase  of  the  subject  will  be  dismissed 
with  a  few  words.  If  the  contentions  already 
made  are  accepted,  it  is  apparent  that  all  such 
commodities  will  gradually  seek  a  higher  level. 
A  brief  examination  of  statistics  will  show 
that' this  readjustment  has  been  going  on  for 
years.  The  gradually  ascending  pivotal  point, 
or  average  price,  is  particularly  marked  in  the 
cheaper  cereals, — corn  and  oats,  and  also  in 
cotton.  This  is  probably  due  to  the  fact  that 
wages  have  not  advanced  as  rapidly  as  have 
prices  of  living.  It  is  found  that  in  periods  of 
hard  times  consumption  of  cheaper  foodstuffs 
and  textile  fabrics  is  increased,  while  the  con- 
sumption of  higher  priced  commodities  and 
luxuries  are  curtailed.  The  wage-earner,  there- 
fore, has  been  in  reality  living  in  a  regime  of 
hard  times,  although  this  fact  is  easily  sub- 
merged by  steadier, employment,  by  a  fictitious 
appearance  of  general  prosperity,  and  the  abil- 


54         THE  CYCLES  OF  SPECULATION 

ity  to  spend  a  larger  number  of  dollars,  without 
realizing  fully  the  loss  of  purchasing  power  in 
the  dollars. 

It  would  be  out  of  the  question  to  attempt  to 
enter  anything  like  a  comprehensive  study  of 
the  question  of  gold  production  and  its  effects 
in  a  single  chapter,  or  even  in  a  single  volume ; 
neither  is  it  necessary  to  the  purposes  of  this 
work,  for  the  student  who  desires  a  compre- 
hensive education  in  this  regard  will  find  ample 
means  and  material  ready  to  his  hand.  From 
the  standpoint  of  investment  and  speculation 
alone,  it  is  submitted  that  increasing  produc- 
tion of  gold  is,  to  use  the  phraseology  of  the 
street,  bearish  on  long  time  bonds  and  other 
securities  yielding  a  limited  rate  of  interest  or 
income,  temporarily  bearish  on  railroad  stocks, 
bullish  on  industrial  shares,  except  as  noted, 
and  bullish  on  speculative  commodities. 

At  the  risk  of  indulging  in  undue  reitera- 
tion, attention  will  again  be  called  to  the 
fallacy  of  considering  such  subjects  as  the 
one  of  gold  production  too  remote  in  concrete 
effects,  or  too  sluggish  in  operation  to  be  of  im- 
portance to  the  speculator.  A  thorough  under- 
standing of  cause  and  effect  bears  upon  the 
operations  ot  today,  in  that  it  anticipates  the 
results  of  tomorrow.  Through  knowledge  of 
influences  of  this  character,  serious  error  may 
be  avoided.    For  example,  one  of  the  profound 


THE  GOLD  SUPPLY  J5 

axioms  0?  the  speculative  world  is  that  bonds 
advance  first  and  stocks  afterwards.  If  we 
understand  why  bonds  have  been,  and  are  at 
present,  declining  we  may  be  justified  in  modi- 
fying this  view  and  considering  the  axiom  more 
or  less  obsolete.  He  who  operates  an  engine 
without  a  clear  understanding  of  its  motive 
power  is  likely  to  get  into  trouble,  or  perhaps 
be  blown  up. 

It  may  be  pointed  out  also,  that  a  too  literal 
acceptance  of  the  suggested  effects  of  this  or 
any  other  great  price  influence  is  highly  dan- 
gerous. Even  while  gold  production  continues 
to  increase  rapidly,  prices,  not  only  of  shares, 
but  of  all  things,  will  overleap  themselves  and 
will  also  swing  backwards  to  the  other  ex- 
treme. The  cycles  are  not  completed,  until 
both  zenith  and  nadir  have  been  touched. 
Changes  in  gold  production  will  not  prevent 
declines  in  prices;  they  will,  however,  inter- 
fere with  the  regularity  of  the  cycles. 

This  chapter  may  be  fittingly  closed  with  the 
following  list  of  conclusions  reached  by  Mr. 
Holt,  in  the  work  already  mentioned.  These 
conclusions  cover  all  the  points  herein  pre- 
sented, and  others  which  are  of  interest  and 
value ; 

"1 — That  both  the  output  and  supply  of  gold  arc 
likely  to  increase  rapidly  for  many  years. 


56         THE  CYCLES  OF  SPECULATION 

"2 — That,  therefore,  the  value  of  gold  will  depre- 
ciate as  the  quantity  increases. 

"3 — That  this  depreciation  will  be  measured  by 
the  rise  in  the  average  price  level. 

"4 — That  a  rising  price  level,  if  long  continued,  is 
accompanied  by  rising  or  high  interest  rates. 

"5 — That  high  interest  rates  mean  lower  prices  for 
bonds  and  all  other  long-time  obligations  drawing 
fixed  rates  of  interest,  dividends,  or  income. 

"6 — Rising  prices  increase  the  cost  of  materials 
and  of  operation  and  tend  to  decrease  the  net  profits 
of  all  concerns,  the  prices  of  whose  products  or  ser- 
vices either  cannot  be  advanced  at  all,  or  are  not 
free  to  advance  rapidly. 

"7 — Rising  prices  tend  to  increase  the  net  profits 
of  all  concerns  that  own  their  own  sources  of  mate- 
rials and  supplies. 

"8 — Rising  prices  of  commodities  tend  to  cause 
the  prices  of  all  tangible  property  to  rise.  This  in- 
cludes lands,  mines,  forests^  buildings  and  improve- 
ments. 

"9— Rising  prices  of  commodities  and  property 
tend  to  increase  the  value  of  the  securities  of  corpo- 
rations holding  commodities  or  property. 

"10 — Rising  prices  and  cost  of  living  necessitate 
higher  money  wages,  though  the  rise  of  wages  will 
follow,  at  some  distance,  behind  the  rise  of  prices. 

"11— As  rising  prices  do  not  mean  increased 
profits  to  all  concerns,  many  employers  will  not  con- 
cede higher  wages  without  strikes. 

"12— Rising  prices  and  wages,  therefore,  mean 
dwindling  profits  and  troublous  times  in  many  in- 
dustries, with  complete  ruin  as  the  final  goal. 

"13 — Because  wages  will  not  rise  as  fast  or  as 
iiiuch  as  prices  and  the  cost  of  living,  there  will  be 


THE  GOLD  SUPPLY  57 

dissatisfaction  and  unrest  among  wage  and  salary 
earners. 

"14 — Rising  prices  of  commodities  and  property 
encourage  speculation  in  commodities,  stocks  and 
real  estate  and  discourage  honest  industry. 

"15 — Thus,  rising  prices,  by  diminishing  the  in- 
comes of  'safe*  investments  in  'gilt-edged'  bonds  and 
stocks  and  by  increasing  the  profits  of  speculators 
encourage  extravagance,  recklessness  and  thriftless- 
ness. 

"16 — As  rising  prices  decrease  the  purchasing 
power  of  debts,  and  thus  aid  debtors  at  the  expense 
of  creditors,  they  discourage  saving  and  thrift. 

"17 — Rising  prices,  then,  by  promoting  specula- 
tion and  extravagance,  increase  consumption,  espe- 
cially of  luxuries,  and,  therefore,  stimulate  produc- 
tion. 

"18 — Rising  prices,  then,  result  in  what  is  real 
prosperity  for  many  industries;  but  what  is  for  a 
nation  as  a  whole,  artificial  or  sham  prosperity — the 
result  of  marking  up  prices  rather  than  of  increasing 
production. 

"19 — With  prices,  wages,  rates  and  industries  al- 
ways imperfectly  adjusted  to  the  ever  depreciating 
value  of  gold,  and  with  instability  and  uncertainty 
throughout  the  financial  world,  there  cannot  but  be 
a  great  shifting  around  of  values  and  of  titles  to 
property. 

"20 — As  this  shifting  is  to  the  advantage  of  the 
debtors — the  rich — and  to  the  disadvantage  of  the 
creditors — the  great  middle  class — it  results  in  rap- 
idly concentrating  wealth  in  the  hands  of  a  compara- 
tively few. 

"21— For  all  of  these  reasons  a  prolonged  period 
of  rapidly  rising  prices  is  reasonably  certain  to  be- 


58        THE  CYCLES  OF  SPECULATION 

come  a  period  of  unrest,  discontentj.  agitation, 
strikes,  riots,  rebellions  and  wars. 

"22 — A  rapidly  depreciating  standard  of  value 
then,  if  long  continued,  not  only  produces  most  im- 
portant results  in  the  financial,  industrial  and  com- 
mercial world,  but  is  likely  to  result  in  changes  of 
great  consequence  in  the  political,  social,  and  relig- 
ious world. 

"In  view  of  all  the  facts,  results  and  possible  con- 
sequences connected  with  the  increasing  output  and 
supply  of  gold,  The  Wall  Street  Journal  was  right 
when,  on  December  4,  1906,  it  said  that  'No  other 
economic  force  is  at  present  in  operation  in  the 
world  of  more  stupendous  power  than  that  of  gold 
production,'^' 


IV 

Money 

From  the  viewpoint  of  the  speculator,  money 
conditions  require  constant  consideration.  It 
goes  without  saying  that  no  sustained  bull 
market  is  possible  unless  money  conditions 
favor  such  a  movement.  We  find  that  at  the 
end  of  a  period  of  inflation,  the  credit  situation 
is  always  strained,  while  a  general  recession 
in  business  will  usually  cure  the  evil. 

The  student  may  enter  this  large  and  im- 
portant branch  of  the  subject  as  deeply  as  he 
likes.  There  are  many  excellent  works  deal- 
ing with  the  various  phases  of  the  subject,  and 
the  question  has  been  so  long  and  carefully 
studied  by  writers,  that  many  important  points 
have  been  established  so  definitely  as  to  admit 
of  little  diversity  of  opinion. 

The  bank  statement  which  is  issued  weekly 
by  the  New  York  Clearing  House,  is  eagerly 
scanned  by  traders,  but  it  is  not  always  the 
case  that  this  scrutiny  is  thorough  or  enlight- 
ening. The  statement  at  its  best,  cannot  be 
considered   more   than   a   barometer,   and    its 


50 


60         THE  CYCLES  OF  SPECULATION 

showings  are  by  no  means  exact,  as  it  is  based 
on  a  system  of  daily  averages.  That  is  to  say, 
the  banks  figure  their  loans,  deposits,  etc.,  for 
each  day  of  the  week,  and  report  the  averages 
to  the  Clearing  House.  This  method  often 
leads  to  a  false  showing.  Commenting  on  this 
fact,  Mr.  S.  S.  Pratt  in  his  book,  "The  Work 
of  Wall  Street,"  says : 

"A  striking  illustration  of  the  effect  of  the 
law  of  averages  upon  the  Bank  Statement  was 
given  in  September,  1902.  The  statement  of 
September  20  reported  a  loss  in  cash  of  $7,- 
300,000,  while  the  actual  loss,  so  far  as  it  could 
be  estimated,  was  only  $3,600,000.  The  state- 
ment of  September  27th,  on  the  other  hand,  re- 
ported a  gain  in  cash  of  $1,790,000,  while  the 
apparent  loss  was  $4,000,000.  The  former 
statement  reported  a  deficit  in  reserve;  the 
latter  a  surplus." 

It  is  the  practice  of  many  speculators  to  ex- 
amine the  bank  statement  merely  as  regards 
the  changes  made  from  week  to  week,  without 
reference  to  the  more  important  totals.  A  de- 
crease in  reserves  is  considered  an  evil,  etc. 
There  is  something  in  this  of  course,  but  such 
methods  and  deductions  are  incomplete  and  in- 
sufficient. A  decrease  in  reserves  when  the 
surplus  is  very  large  may  be  practically  mean- 
ingless, while  the  same  amount  of  decrease 
when  reserves  are  small  may  be  significant.  It 


MONEY  61 

is  a  good  deal  like  the  difference  between  a 
man  spending  a  dollar  when  he  has  a  hundred, 
and  spending  his  last  dollar. 

The  most  important  general  information  to 
be  gained  from  the  bank  statement,  is  by  a 
comparison  of  loans  with  deposits,  and  specie 
with  loans.  We  may  thus  arrive  at  a  fairly 
correct  idea  of  the  state  of  trade  and  the  expan- 
sion of  credits.  If  we  find  that  loans  are  in  ex- 
cess of  deposits,  and  the  percentage  of  specie 
small,  we  may,  with  certain  qualifications,  de- 
duce inflation;  while  on  the  other  hand,  the 
extent  of  liquidation  may  be  judged  in  case 
these  conditions  are  reversed.  As  an  example 
of  this  process,  the  following  historical  facts 
are  given. 

In  1890,  twenty  stocks  listed  on  the  New 
York  Exchange  were  selling  at  an  average 
price  of  about  $87  per  share.  The  percentage 
of  loans  to  deposits  was  about  95%  and  the 
percentage  of  specie  to  loans  about  20%.  In 
November  of  that  year,  loans  advanced  to 
102%  as  compared  with  deposits,  and  specie 
declined  to  about  18%^  of  loans.  The  stocks 
mentioned  declined  to  an  average  price  of  $64 
per  share,  and  later  in  1901  to  about  $61  per 
share.  From  1891  to  1893  there  was  some 
alternate  improvement  and  retrogression  in 
money  conditions,  all  of  which  was  accurately 
reflected  in  stock  prices. 


62         THE  CYCLES  OF  SPECULATION 

In  1893,  the  proportion  of  loans  to  deposits 
rose  to  about  109%,  and  proportion  of  specie 
to  loans  declined  to  13%.  The  average  price 
of  the  twenty  stocks  reached  about  $47  per 
share.     (The  panic  of  1893). 

In  1894,  the  proportion  of  loans  to  deposits 
fell  to  80%,  and  specie  to  loans  rose  to  30%. 
This  was  due  to  the  liquidation  of  1893.  Stock 
prices  showed  some  betterment,  rising  to  about 
$57  per  share.  The  severe  drubbing  of  1893 
had  made  public  investors  nervous,  and  had  in 
many  cases  incapacitated  them  for  stock 
market  operations.    That  was  to  come  later. 

In  1896,  the  proportion  of  loans  to  deposits 
rose  to  102%,  and  specie  to  loans  fell  to  10%. 
Stocks  reached  their  lowest  level  in  July  of  this 
year  ($42  per  share  for  the  twenty  stocks  men- 
tioned). 

From  1896  to  1898,  a  gradual  improvement 
was  apparent.  Through  all  this  period  stock 
prices  faithfully  reflected  money  conditions.  In 
July,  1898,  the  proportion  of  specie  to  loans 
rose  to  30%  and  loans  to  deposits  fell  to  83%. 
Stocks  began  advancing  and  in  March,  1899, 
the  average  price  of  the  twenty  stocks  con- 
sidered, was  about  $85  per  share. 

In  June,  1900,  the  average  price  of  the 
twenty  stocks  considered,  was  about  $75  per 
share.  The  proportion  of  specie  to  loans  was 
about  22%,  and  the  proportion  of  loans  to  de- 


MONEY  63 

posits  was  about  90%.  From  January,  1901, 
until  September,  1902,  money  conditions  did 
not  improve,  but  stocks  continued  to  advance. 
There  were  large  crops  and  a  general  wave  of 
expansion  and  prosperity  swept  the  country. 
In  September,  1902,  the  proportion  of  loans  to 
deposits  was  99%,  and  the  proportion  of  specie 
to  loans  about  17%.  Meanwhile  stocks  were 
high — $128  per  share  for  our  twenty  stocks. 
Conditions,  though  temporarily  ignored,  as- 
serted themselves  in  1903,  and  in  September 
of  that  year,  the  average  price  of  the  twenty 
stocks  was  about  $88  per  share;  the  percent- 
age of  loans  to  deposits  101%  and  specie  to 
loans  19%.  The  money  situation  had  not 
changed  materially,  but  the  stock  market  was 
making  a  deferred  payment. 

In  August,  1904,  the  proportion  of  loans  to 
deposits  had  fallen  to  907c  and  specie  to  loans 
had  risen  to  25%.  The  stock  market  was 
steadily  advancing,  and  in  January,  1906, 
stocks  reached  their  pinnacle — $138  per  share 
for  the  twenty  securities  considered. 

It  will  be  observed  that  while  stock  market 
movements  do  not  always  immediately  reflect 
good  or  bad  conditions  in  the  financial  world, 
the  effect  is  ultimately  felt.  We  are  pretty  safe 
in  assuming  that  whenever  loans  are  unduly 
expanded  and  the  percentage  of  specie  is 
small,    these    conditions    must    be    corrected 


64  THE  CYCLES  OF  SPECULATION 

either  by  a  halt  in  business  or  by  liquidation; 
and  the  word  liquidation  here  means  a  clean- 
ing up  in  other  lines,  as  well  as  in  the  stock 
market.  It  is  sometimes  the  case  that  after  the 
stock  market  has  suffered  a  severe  decline, 
there  is  little  improvement  in  the  monetary 
situation  as  shown  in  the  bank  statement.  In 
January,  1907,  for  example,  the  percentage  of 
loans  to  deposits  was  about  102%,  and  specie 
to  loans  about  17^%.  The  average  price  of 
twenty  active  stocks  at  that  time,  was  about 
130.  At  the  present  writing  (June,  1907)  those 
same  shares  have  fallen  to  an  average  price  of 
about  101,  and  there  is  no  appreciable  change 
in  the  relation  of  loans  to  deposits,  or  specie  to 
loans.  On  June  8th,  1907,  the  bank  statement 
showed  loans  to  deposits  102%,  and  specie  to 
loans  a  little  below  19%.  This  state  of  affairs 
would  naturally  lead  to  the  belief  that  unless 
we  are  vigorously  assisted  by  some  powerful 
factor,  such  as  good  crops,  we  now  face  a 
period  where  either  a  decided  slowing  up  or  an 
actual  recession  in  general  business  is  impera- 
tive. On  this  theory,  fortified  or  modified  by 
a  study  of  extraneous  effects,  the  speculator  or 
investor  may  gain  a  valuable  knowledge  of 
probable  future  movements  in  the  stock 
market.  If  he  decides  that  the  case  is  a  bad 
one  and  that  a  set-back  in  business  will  occur, 
he  may  argue  that,  even  if  stocks  are  low  in 


MONEY  65 

price,  there  is  little  hope  of  a  material  upward 
movement  in  any  quarter.  It  would  also  be 
evident  that  the  industrial  shares  would  suffer 
more  in  price  than  the  railroad  shares;  for, 
under  present  conditions,  a  decline  in  the  price 
of  products  generally  helps  the  railroad  cor- 
porations to  some  extent  by  permitting  advan- 
tageous purchases.  For  instance,  if  finished 
steel  and  iron  products  decline  in  price,  the  rail- 
roads might  be  enabled  to  carry  out  projected 
extensions  to  better  advantage  than  otherwise, 
while  the  manufacturing  companies  would  suf- 
fer a  considerable  loss  of  profits.  It  is,  of  course, 
true  that  a  recession  in  business  is  felt  in  all 
lines,  but  as  the  selling  rate  of  transportation 
is  more  fixed  than  prices  of  commodities,  and 
as  the  producing  companies  gain  less  by  a  re- 
cession in  the  prices  of  the  commodities  they 
buy  than  do  the  railroads,  the  industrial  stocks 
are  more  adversely  affected.  This  may  appear 
as  a  sort  of  compensation  for  the  fact  that  while 
rates  for  transportation  do  not  advance  as 
easily  as  prices  of  commodities,  neither  do  they 
fall  as  rapidly  in  periods  of  depression. 

In  examining  the  bank  statement  as  a  ba- 
rometrical showing  of  money  conditions,  it 
should  be  remembered  that  an  increase  in  de- 
posits does  not  mean  an  increase  in  cash.  The 
bank  statement  may  show  an  increase  in  loans 
of  $1,000,000  and  an  increase  in  deposits  based 


66         THE  CYCLES  OF  SPECULATION 

on  these  loans.  That  is  to  say,  $1,000,000  may 
have  been  borrowed  on  commercial  paper,  and 
the  proceeds  passed  to  the  credit  of  the  bor- 
rowers. Commenting  on  this  fact,  Theodore 
Burton  says: 

"But  in  the  modern  development  of  banking  the 
actual  money  deposited  is  much  less  important  in 
determining  the  amount  of  deposits,  because  so 
large  a  share  of  them  represents  credits  obtained  by 
loans,  etc.  These  credits  are  transferred  upon  or- 
ders executed  by  depositors,  and  furnish  a  substitute 
for  currency.  In  proportion  as  payments  and  set- 
tlements are  made  by  checks,  drafts,  and  bills  of 
exchange,  deposits  maintain  an  increased  proportion 
to  the  amount  of  currency  in  circulation.  This  class 
of  deposits  increases  prior  to  a  crisis  rather  than 
diminishes,  because  loans  increase. 

"In  the  reports  of  national  banks,  there  is  a  strik- 
ing correspondence  from  year  to  year  in  the  volume 
of  deposits  and  that  of  loans  and  discounts.  Depos- 
its show  more  frequent  fluctuations,  but  rise  and  fall 
in  general  accord  with  loans  and  discounts.  This 
correspondence  is  easily  explained.  Another  dis- 
tinction should  be  noted.  Some  deposits  are  the 
result  of  completed  transactions,  and  are  based  upon 
the  proceeds  of  sales  made,  amounts  realized  from 
investments,  etc.  Others  merely  represent  loans  or 
discounts  the  proceeds  of  which  are  entered  to  the 
credit  of  the  borrower.  Before  every  crisis  there  is 
an  unusual  proportion  of  deposits  which  are  based 
upon  loans.  If  in  bank  statements  there  could  be 
separate  colums  for  these  two  kinds  of  deposits,  the 
information  afforded  by  their  increase  or  decrease 
would  be  much  more  valuable." 


MONEY  67 

This  point  shows  the  necessity  of  consider- 
ing not  only  the  proportion  of  loans  to  deposits 
but  of  specie  to  loans.  On  this  point  Mr.  Bur- 
ton says: 

"A  continuous  decrease  of  specie  attended  by  an 
increase  in  outstanding  discounts  is  always  a  dan- 
ger signal.  The  gap  between  the  two  may  widen  for 
months,  and  even  for  years,  and  may  fluctuate  from 
time  to  time,  but  a  sudden  change  of  large  propor- 
tions, or  a  steady  decrease  of  the  percentage  of 
specie  is  an  unfailing  indication  of  danger.  The 
reason  for  this  is  not  hard  to  discover.  The  quan- 
tity of  metallic  money  in  a  country  shows  what  part 
of  its  capital  is  available  as  money  for  the  payment 
of  its  obligations  to  foreign  countries,  the  final  test 
of  availability.  For  this  last  named  purpose  credit 
money  cannot  be  used,  but  only  money  having  in- 
trinsic value — money  of  the  Mercantile  Republic, 
as  it  is  called  by  Adam  Smith." 

The  conclusion  reached  therefore,  is  that  an 
increase  in  loans  and  discounts  with  no  corres- 
ponding increase  in  cash  or  with  an  actual  de- 
crease in  cash,  reflects  a  bad  state  of  affairs, 
even  when  the  advance  in  loans  and  discounts 
appears  to  be  fully  offset  by  deposits. 

There  is  one  feature  which  should  not  be 
overlooked.  The  very  worst  state  of  affairs 
may  be  shown  in  the  bank  statement  during  a 
period  of  great  commercial  activity  and  in- 
flation in  all  lines.  The  reverse  is  also  true. 
In  1894,  following  the  panic  of  1893,  the  per- 
centage of  loans  to  deposits  fell  to  80%  and 


68  THE  CYCLES  OF  SPECULATION 

the  percentage  of  specie  to  loans  rose  to  30%; 
but  no  bull  market  occurred.  This  was  due  to 
stagnation  in  all  lines  of  business,  a  period  of 
timidity  and  conservatism.  In  1895,  there  were 
signs  of  a  great  improvement  and  the  stock 
market  started  upward.  This  improvement, 
however,  proved  illusory  and  premature. 
Loans  rose  quickly  to  95%  of  deposits  and 
specie  fell  below  15%  of  loans.  Then  followed, 
in  1896,  the  new  record  of  low  prices. 

In  studying  the  bank  statement  for  its  effects 
on  speculative  prices,  surplus  reserves  will  fre- 
quently suggest  danger  or  safety.  If  surplus 
reserves  dwindle  too  near  the  vanishing  point, 
the  possibility  of  necessary  retiring  of  call 
loans  is  apparent.  (See  "Bank  Statement," 
page  125). 

It  is  possible  to  gain  valuable  knowledge  by 
a  careful  examination  of  the  bank  statement. 
The  points  made  above  are,  of  course,  only  of 
a  simple  and  elemental  character.  We  may 
go  on  with  our  examination  as  far  as  we  like 
and  scrutinize  not  only  totals,  but  the  position 
of  individual  banks..  Also,  in  order  to  gain  a 
comprehensive  perspective,  it  will  be  expedi- 
ent to  examine,  not  only  the  barometer  of  the 
New  York  situation,  but  the  condition  of  in- 
terior banks.  However,  it  is  a  pretty  good 
idea  to  begin  with  the  A,  B,  Cs. 

High  rates  for  call  money  and  the  calling  of 


MONEY  69 

loans  are  responsible  for  many  sharp  market 
movements.  A  large  class  of  speculators  figure 
that  when  dividend  returns  are  high  and  call 
money  cheap  and  plentiful,  they  have  a  tangible 
influence  working  in  their  favor  while  they  are 
long  of  stocks.  If  rates  for  call  money  are  2% 
and  a  stock  returns  6%  there  is,  eliminating 
speculation,  an  advantage  of  4%  per  annum  in 
favor  of  the  marginal  speculator.  This  advan- 
tage is  not  so  great  in  carrying  stocks  on  time 
loans,  as  rates  for  fixed  periods  are  materially 
higher.  There  is  always  danger  of  a  flurry  in 
call  money,  however,  and  in  the  event  of  a 
wholesale  calling  of  loans  there  arises  the  ne- 
cessity of  selling  stocks,  and  a  decline  occurs. 
There  is  also  present  the  element  of  manipu- 
lation in  this  quarter,  and  it  cannot  be  gainsaid 
that  many  instances  have  occurred  where 
funds  have  been  suddenly  withdrawn  for  the 
purpose  of  "shaking  out"  an  undesirable  follow- 
ing or  of  accumulating  securities  to  advantage ; 
and  on  the  other  hand,  call  money  has  fre- 
quently been  made  cheap  in  order  to  encourage 
purchases. 

There  are  two  periods  of  the  year  when  the 
stock  market  is  affected  by  disbursements  of 
money  in  the  form  of  interest  and  dividends. 
The  two  dates  at  which  heavy  disbursements 
occur,  are  January  1st  and  July  1st.  It  is  a 
popular  belief  that  just  prior  to  each  of  these 


70         THE  CYCLES  OF  SPECULATION 

dates,  money  will  grow  "tight"  because  of  the 
necessary  provisions  made  by  banks  and  other 
corporations  to  meet  such  payments.  Follow- 
ing the  actual  distribution  of  funds,  it  is  the 
theory  that  a  part  of  this  money  will  seek  re- 
investment in  bonds  and  shares.  A  great  many 
speculators  argue  that  this  would  naturally 
produce  stringency,  the  possible  calling  of 
loans,  and  consequently  lower  security  prices 
in  the  latter  half  of  December  and  June  and  an 
advance  early  in  January  and  July.  While  this 
reasoning  looks  sound  enough  on  its  face,  it  is 
not  at  all  dependable.  It  is  certain  that  every- 
thing is  discounted  in  advance  of  actual  events 
in  speculative  circles,  and  the  more  widely  such 
theories  as  the  one  mentioned  are  dissemi- 
nated, the  more  dangerous  and  inoperative 
they  become.  Instances  are  not  lacking  in  re- 
cent years,  where  the  technical  situation  grow- 
ing out  of  this  reasoning,  has  not  only  nullified 
the  theoretical  action,  but  has  resulted  in  actual 
reversal,  i.e.:  an  advance  just  preceding  dis- 
bursements and  a  decline  at  the  time  the  dis- 
tributed funds  were  presumably  returning 
to  investment  channels.  Numerous  shrewd 
people,  anticipating  an  advance  in  January  and 
July,  have  attempted  to  take  time  by  the  fore- 
lock by  effecting  purchases  in  December  and 
June.  Their  buying,  being  of  a  competitive 
character,    not    only    carries    prices    upward 


MONEY  71 

prematurely,  but  creates  a  weak  speculative 
long  interest,  subject  to  disappointment  if 
funds  do  not  reappear  in  the  volume  expected, 
or  susceptible  to  attack  by  great  manipulators. 
There  is  another  objection  to  this  theory  of 
periodicity.  If  the  market  is  dull  and  stagnant, 
with  little  public  interest,  it  behooves  the  large 
interests  which  have  stocks  for  sale  to  bid  up 
prices  and  create  activity  prior  to  the  heavy 
distributions  of  funds.  They  may  accomplish 
two  things  by  this  process.  They  make  not 
only  a  higher  level  of  prices  at  which  to  sell 
their  wares,  but  create  what  is  of  even  greater 
importance,  an  appearance  of  activity,  pros- 
perity and  a  newspaper  market.  It  is  strangely 
illogical,  but  unquestionably  true,  that  people 
who  would  flatly  refuse  to  enter  a  market  at 
a  low  level  of  prices  will  rush  in  to  buy  ten 
points  higher  if  the  factors  of  bustle  and  ex- 
citement are  present.  Both  the  doctrine  of 
common-sense  and  the  calculus  of  probabilities 
would  establish  the  fact  that  each  advance 
brings  us  nearer  the  top,  and  each  decline 
brings  us  nearer  the  bottom ;  but  few  men  can 
train  themselves  away  from  the  idea  that  an 
upturn  already  established  does  not  indicate 
higher  prices  and  vice  versa.  It  is  a  sort  of 
enthusiasm  which  a  minority  understand,  how- 
ever, and  make  good  use  of.  The  psychologi- 
cal effect  of  mere  excitement  is  one  of  the 


72  THE  CYCLES  OF  SPECULATION 

explanations  of  the  incontrovertible  fact  that 
the  public  usually  buys  at  high  prices  and  sells 
at  low  prices. 

The  acceptance  of  certain  periods  or  seasons 
as  a  guide  to  either  purchases  or  sales  of 
stocks  is,  in  the  last  analysis,  merely  a  form  of 
chart-playing.  It  is  natural  to  evade  a  studi- 
ous examination  of  the  general  business  and 
monetary  situation  and  to  resort  to  a  simple, 
albeit  a  superficial  diagnosis,  which,  being  in- 
sufficient and  incomplete,  is  dangerous.  It  is 
suggested  that  while  the  double  effects  of  con- 
traction prior  to  distribution  should  be  under- 
stood and  examined,  the  only  safe  method  is 
to  go  behind  these  temporary  and  periodical 
changes  and  study  the  whole  basic  structure 
comprehensively.  We  may  find  that  money  is 
in  demand  for  the  purpose  of  propping  and 
sustaining  an  unsound  business  condition,  and 
that  it  will  in  all  probability  fail  to  return  in 
volume  to  the  security  markets.  This  occurred 
in  January,  1907,  and  the  believers  in  a  "Janu- 
ary rise,"  were  badly  disappointed.  Interest 
rates  on  money  must  also  be  given  consider- 
ation. If  the  commercial  world  is  striving  to 
secure  funds  at  a  higher  rate  of  interest  than 
is  offered  on  shares,  money,  or  a  good  portion 
of  it,  will  go  where  interest  returns  are  great- 
est. And  in  this  regard  it  may  be  said,  that 
merely  local  interest  rates  are  not  always  a 


MONEY  73 

good  indication  of  money  affairs  in  the  busi- 
ness world.  Not  long  ago,  the  writer,  being 
suspicious  of  the  claims  of  plentiful  money 
and  low  rates  in  New  York,  investigated  the 
matter  through  Western  bankers  and  found 
that  prime  paper  was  being  offered  west  of 
the  Missouri  River  at  much  higher  rates.  This 
was  made  particularly  significant  by  the  fact 
that  previously  the  borrowers  had  always  been 
able  to  supply  their  needs  at  home,  and  that 
the  loans,  being  offered  through  brokers,  really 
cost  about  Yi'Jo  more  than  was  apparent  on 
their  face. 

It  is  frequently  interesting  and  instructive 
to  examine  the  character  of  collateral  behind 
loans,  and  find  out  how  large  a  percentage  of 
this  collateral  consists  of  stocks  and  like  se- 
curities. Our  stock  market  might  appear  to 
be  in  a  sold  out  condition,  when,  in  reality,  a 
very  bad  technical  condition  obtained.  The 
purely  marginal  speculative  account  in  New 
York  City,  or  other  important  centers,  is  car- 
ried on  under  certain  flexible  rules  or  customs 
as  to  the  amount  of  money  loaned  on  certifi- 
cates; but  in  cases  where  securities  have  been 
widely  purchased  for  cash  by  small  holders, 
and,  in  the  event  of  general  tightness  in  money 
or  depression  in  business,  made  the  basis  of 
loans  in  country  banks,  but  we  have,  in  fact,  a 
very  weak  marginal  public  account.   The  home 


74  THE  CYCLES  OF  SPECULATION 

banker  will  loan  more  liberally  to  his  towns- 
men and  will  scrutinize  the  movements  of 
prices  or  the  stages  of  the  market  less  closely 
than  the  city  banker,  and  the  certificates 
owned  by  small  holders  and  deposited  as  col- 
lateral may,  in  the  aggregate,  represent  an 
enormous  line  of  shares.  It  would  be  quib- 
bling to  say  that  this  situation  represented 
anything  less  serious  than  a  weakly  margined 
public  line.  If  the  market  declined  materially, 
the  bankers  would  be  forced,  in  self-protection, 
to  call  for  more  collateral,  and  the  result  would 
depend,  as  in  all  other  cases,  on  the  ability  of 
the  individual  holder  to  take  care  of  himself. 
Such  a  condition  existed  in  U.  S.  Steel  stocks 
in  the  depression  of  1903,  and  was  pointed  out 
3t  the  time  by  the  writer.  The  knowledge 
obtained  was  based  barometrically  on  informa- 
tion obtained  from  a  number  of  bankers  in 
different  localities. 

While  interest  rates  for  both  time  and  call 
money  are  frequently  fictitious,  or  of  a  tempo- 
rary and  artificial  nature,  and  no  set  rules  can 
be  laid  down  as  to  certain  conditions  in  money 
and  their  immediate  effects  upon  security 
values,  it  is  not  difficult  to  gain  a  general  idea 
of  underlying  conditions.  We  have  always  at 
hand  statistics  which  will  reflect  faithfully  the 
fundamental  basis  of  the  entire  world  struc- 
ture.   But  in  this  important  division,  as  in  most 


MONEY  75 

Other  branches  of  speculation,  we  often  find 
that  what  is  really  important  is  absolutely 
ignored,  while  matters  of  little  moment  are 
harped  upon,  or  even  made  the  basis  of  oper- 
ations. Thus,  every  habitue  of  brokerage 
offices  eagerly  watches  the  bank  statement  or 
the  rates  on  call  money,  and  knows  nothing 
about  the  expansion  of  credits,  even  when  such 
expansion  has  reached  a  point  that  would  make 
a  crisis  appear  inevitable.  No  better  proof  of 
this  can  be  offered  than  the  fact  that  our 
heaviest  business  and  greatest  inflation,  have 
frequently  gone  merrily  forward  for  a  year  or 
more  under  suicidal  conditions.  These  con- 
ditions have  sometimes  been  so  obvious,  so 
forcible,  that  it  would  appear  impossible  to 
view  them  with  equanimity.  In  a  majority  of 
cases  they  were  probably  not  viewed  at  all, 
and  the  thoughtful  men  who  pointed  out  the 
danger  have  been  called  calamity  howlers  or 
pessimists.  There  is  one  great  check  to  edu- 
cation in  this  direction:  great  financiers  who 
are  most  conversant  with  actual  conditions, 
seldom  find  it  expedient  to  point  out  the  facts. 
Sometimes  they,  themselves,  wish  to  dispose 
of  their  holdings  because  of  the  obvious  peril 
ahead  and  this  process  would  not  be  facilitated 
by  gloomy  predictions.  On  the  other  hand, 
it  is  too  often  the  case  that  these  same  gentle- 
men, finding  it  to  their  great  advantage  to  dis- 


76         THE  CYCLES  OF  SPECULATION 

perse  sunshine  until  their  goods  are  sold,  point 
assiduously  to  the  excellent  business  of  the 
present,  and  neglect  to  touch  on  the  irrepress- 
ible future,  which,  after  all,  is  the  most  im- 
portant question  to  the  investor  or  speculator. 


Political  Influences,  Crops,  Etc. 

The  possibility  of  legislation  adverse  to  cor- 
porations is  always  present  as  a  market  factor, 
and  at  times  severe  declines  have  been  recorded 
through  such  action.  It  is  not  always  the  case 
that  such  legislation  is  truly  a  bear  factor,  al- 
though it  is  fashionable  to  so  interpret  any- 
thing in  the  nature  of  legislative  interference 
with  corporate  affairs.  It  is  the  writer's  opin- 
ion that  a  great  deal  of  misunderstanding  has 
recently  arisen  in  regard  to  the  attitude  of  cer- 
tain party  leaders  toward  the  heads  of  great 
railroad  corporations.  The  opinion  has  been 
widely  fostered  by  opposing  politicians  and 
others  that  the  credit  of  railroad  corporations 
-was  being  badly  impaired,  and  the  interests  of 
stockholders  jeopardized  because  investiga- 
tions were  ordered  as  to  the  methods  of  indi- 
viduals  or  directorates. 

It  does  not  appear  that  any  reasonable  man 
could,  as  the  stockholder  of  a  corporation,  or 
as  a  private  citizen,  object  to  having  dishonest 
or  sharp  practices  on  the  part  of  the  active 


77 


78         THE  CYCLES  OF  SPECULATION 

management  of  the  property  in  question  ex- 
posed and  prevented.  Where  it  is  shown  that 
an  individual,  in  his  capacity  as  the  head  of  a 
business,  has  employed  his  office  as  a  means 
of  juggling  stocks  or  reaping  enormous  per- 
sonal gains,  it  cannot  but  be  to  the  interest  of 
stockholders  to  have  such  practices  stopped. 
If  the  means  at  issue  are  honest  and  legitimate, 
the  benefits  reaped  should  go  to  the  stock- 
holders. It  is  impossible  to  reconcile  any 
other  plan  with  equity  and  common  honesty. 
Let  us  look  at  the  matter  without  the  mystery 
that  obscures  the  affairs  of  a  great  corporation. 

Suppose  a  member  of  a  certain  firm,  its  man- 
ager, finding  the  firm  in  need  of  funds,  secures 
money  at  a  high  rate,  and  at  great  profit  to 
himself — is  that  right?  Or  is  it  the  manager's 
business  to  work  entirely  in  the  interest  of  the 
partners  he  represents?  Is  it  possible  for  him 
to  legitimately  acquire  personal  profit  of  any 
kind  in  administering  the  affairs  of  the  firm? 
It  is  not  sufficient  to  point  out  that  the  man- 
ager's action  in  securing  funds  redounded  to 
the  great  benefit  of  the  business  concern,  or 
that  his  capability  and  shrewdness  were  re- 
flected in  enormous  partnership  profits.  His 
associates  in  business  are  entitled  to  all,  not 
a  portion,  of  the  gains  secured  in  the  manage- 
ment of  its  affairs. 

It  is  submitted  that  much  of  our  recent  leg- 


POLITICAL  INFLUENCES,  CROPS,  ETC.  79 

islation  which  is  popularly  supposed  to  have 
injured  stock  values  has,  in  reality,  aimed  to 
protect  the  small  holder  and  throttle  the  un- 
scrupulous men  who,  while  actually  in  their 
employ,  were  milking  their  business  of  mil- 
lions. Legislation  which  effects  publicity  and 
simplicity  in  the  affairs  of  corporations  is  an 
unmixed  benefit  to  the  small  investors. 

It  is  almost  invariably  the  case  that  when  a 
great  decline  in  stock  prices  occurs,  the  set- 
back is  popularly  attributed  to  some  factor 
which,  in  reality,  had  little  to  do  with  the  re- 
versal. In  the  decline  of  1907,  thousands  of 
people  attributed  the  inability  of  railroads  to 
borrow  money  at  low  rates  of  interest  almost 
entirely  to  hostile  legislation.  Apparently 
these  rapid-fire  thinkers  did  not  know  or  real- 
ize that  interest  rates  had  risen  the  world  over, 
that  there  was  not  a  free  money  market  in  the 
world,  and  that  money,  instead  of  being  with- 
held from  4%  issues,  was  fully  employed  in 
other  lines.  Such,  however,  was  the  case; 
British  Consols,  French  Rentes, — all  the  choice 
securities  of  civilized  countries  had  kept  pace 
with  the  declines  in  our  own  bonds  and  stocks ; 
but  these  facts  seem  to  be  unappreciated. 

It  is  true  that  adverse  legislation  sometimes 
seriously  impairs  the  value  of  a  security.  A 
public  utilities  company,  for  example,  which 
is  forced  to  reduce  its  selling  rate,  is  unques- 


80         THE  CYCLES  OF  SPECULATION 

tionably  injured  from  an  investment  point  of 
view.  Such  legislation,  however,  may  be 
weighed  correctly  by  a  little  calm  consider- 
ation, and  it  may  be  said  that  action  of  this 
nature  is  usually  for  the  purpose  of  correcting 
abuses,  rather  than  as  a  revengeful  and  confis- 
catory attack  on  vested  interests.  Measures 
which  prevent  a  fair  return  on  capital  will  per- 
ish of  their  own  iniquity.  So  far  as  measures 
which  are  formed  to  prevent  extortion  are  con- 
cerned, it  is  impossible  to  criticize  them. 

In  order  to  correctly  weigh  the  effects  of 
legislative  measures  on  security  values  and 
prices,  we  must  therefore  examine  fairly  what 
the  legislation  seeks  to  accomplish,  taking  care 
not  to  allow  a  contemporaneous  price  move- 
ment which  may  be  due  to  other  causes,  to  act 
as  a  verification  of  a  false  view.  This  error 
occurs  very  frequently ;  in  fact,  one  of  the  most 
remarkable  things  about  speculation  is  that 
the  true  causes  of  great  movements  are  fully 
appreciated  by  the  majority  only  in  retrospect. 

The  probable  market  effect  of  legislative  and 
political  affairs  can  be  correctly  gauged  only 
by  examining  the  nature  and  importance  of  the 
issue  in  question.  This  is  true  not  only  of 
state  and  municipal  action,  but  in  regard  to 
presidential  elections.  There  is  a  popular  idea 
that  it  is  dangerous  to  buy  stocks  on  the  eve 
of  a  new  presidential  campaign,  but  there  is 


POLITICAL  INFLUENCES,  CROPS,  ETC.  81 

not  much  in  history  to  uphold  the  view.  True, 
in  a  majority  of  cases,  a  decUne  has  preceded 
such  a  contest,  but  there  have  been  frequent 
reversals  of  this  action,  and  we  have  had  too 
few  elections  to  attempt  any  chart-playing  on 
this  influence.  Such  a  guide  would  be  em- 
pirical. 

The  issues  involved  in  a  presidential  contest, 
however,  may  sometimes  influence  prices. 
Here  again  a  careful  examination  of  facts  and 
probabilities  will  generally  uncover  the  truth. 
If  the  nominee  of  one  party  stands  on  a  dan- 
gerous platform  and  the  outcome  of  the  con- 
test is  in  doubt,  we  may  well  dispose  of  shares 
if  for  no  better  reason  than  that  the  element 
of  danger  is  present.  Danger,  whether  or  not 
it  is  finally  realized,  is  a  bear  factor,  just  as 
safety  is  a  bull  factor. 

Tariff  agitation  should  be  accorded  careful 
consideration  by  the  speculator.  This  is  par- 
ticularly true  as  regards  the  effect  on  indus- 
trial corporations.  A  reduction  of  the  present 
tariff  on  Iron  and  Steel,  for  instance,  would 
materially  lower,  if  not  destroy,  the  value  of 
many  of  the  common  stocks  of  steel  manu- 
facturing corporations.  A  very  clear  and  com- 
prehensive work  on  this  subject  is  mentioned 
in  the  bibliography  on  page  183. 

No  cut  and  dried  rules  or  suggestions  can  be 
offered  as  to  the  effects  of  political  or  legisla- 


82  THE  CYCLES  OF  SPECULATION 

tive  issues  on  prices.  Each  point  must  be 
scrutinized  as  it  arises,  and  judgment  formed 
thereon.  Sympathetic  movements  will  some- 
times occur  because  of  apprehension  or  mis- 
understanding, but  such  effects  will  be  short- 
lived. 

Crops  and  Crop  Failures. 

The  question  of  crop  failures  is  of  great  im- 
portance. It  is  not  difficult  to  form  a  fairly 
correct  idea  as  to  the  ultimate  yield.  The  esti- 
mates of  the  Government  sometimes  go  wide 
of  the  mark,  but  it  must  be  remembered  that 
they  are  estimates  and  nothing  more,  and  that 
conditions  may  change  somewhat  after  the 
figures  are  compiled.  The  speculator  is  fre- 
quently confused  by  the  conflicting  opinions  of 
private  experts.  It  is  probably  safer  to  disre- 
gard the  various  authorities  and  pin  one's  faith 
to  the  computations  of  the  bureau  at  Washing- 
ton. These  official  documents  have  been  criti- 
cized at  times,  and  no  doubt  the  criticism  has 
been  warranted,  but  they  form  our  most  de- 
pendable source  of  information  and  will  im- 
prove as  time  rolls  on. 

A  crop  failure,  or  a  short  crop,  Invariably 
brings  forth  much  fallacious  vaporing  from  the 
rooters  of  Wall  Street.  They  are  as  bad  in 
their  efforts  to  obscure  the  truth  as  are  the 
crop-killers   with  their   fabrications.     A   crop 


POLITICAL  INFLUENCES,  CROPS,  ETC.  83 

failure  is  a  serious  thing  and  must  be  faced  as 
such.  The  contention  which  is  always  heard 
in  lean  seasons,  that  the  evil  has  been  counter- 
acted because  of  the  large  reserves  of  Wheat, 
Corn  or  Cotton  in  farmers'  hands  is  ridiculous. 
Farm  reserves  are  wealth.  They  have  already 
found  their  place  in  the  business  structure.  In 
many  cases  the  money  they  represent  has  al- 
ready been  spent  in  the  form  of  credits.  Nor 
do  high  prices  for  cereals  or  cotton  overcome 
the  evils  of  short  production.  Small  crops 
mean  decreased  employment  for  laborers;  a 
diminution  of  per  capita  purchasing  power, 
and  increased  cost  of  living.  They  also  mean 
smaller  tonnage  for  the  railroads,  and  conse- 
quently decreased  earnings. 

And  in  examining  crop  prospects,  we  should 
consider  the  fact  that  each  year's  normal  crop 
should  be  larger  than  the  one  preceding  it. 
This  is  distinctly  shown  by  tracing  production 
back  for  a  term  of  years. 

There  will,  of  course,  be  fluctuations  in  this 
gradual  increase,  but  the  tendency  is  certain. 
We  may  also  consider  that  as  railroads  are 
constantly  extending  their  lines  and  increasing 
their  facilities,  it  follows  that  increased  pro- 
duction in  the  commodities  they  transport  is 
necessary  to  their  well  being. 

And  short  crops  the  world  over  in  the  same 
year  have  the  same  elements  of  economic  evil. 


84  THE  CYCLES  OF  SPECULATION 

The  purchasing  power  of  the  world  is  reduced, 
and  even  if  we  ourselves  make  fair  crops  and 
export  them  at  high  prices,  the  world's  pov- 
erty is  felt  in  lack  of  demand  for  other  export- 
able surplus.  The  civilized  world  is  too  closely 
knit  together  in  its  affairs  to  permit  of  the 
entire  localization  of  the  effects  of  a  serious 
property  loss. 

A  lean  crop  year  can  probably  do  more  to 
temporarily  injure  the  actual  value  of  railroad 
shares  than  can  any  other  single  influence 
bearing  on  prices.  Tonnage  is  affected  both 
ways,  so  is  passenger  traffic.  There  is  less 
grain  or  cotton  to  haul  to  the  markets,  and,  as 
purchasing  power  has  been  reduced  in  the  af- 
fected localities,  there  is  less  freight  to  haul 
back  to  the  producers.  In  the  last  analysis,  the 
products  of  a  community  represent  to  a  great 
extent  the  mere  exchange  of  these  products  for 
other  luxuries  and  necessities,  and  the  effect  of 
decreased  production  is  a  two-edged  sword, 
so  far  as  the  transporting  companies  are  con- 
cerned. 

Accidents. 


The  efifect  of  accidents  on  stock  prices  has 
been  fully  discussed  in  a  former  work,  and  the 
contention  offered  that  accidents  could  no 
more  be  provided  against,  or  considered,  in 
the  investment  or  speculative  world  than  in 


POLITICAL  INFLUENCES,  CROPS,  ETC.   85 

any  other  walk  of  life.  It  is  also  thought  that 
accidents  are  more  frequently  the  excuse  for 
movements  than  the  cause  of  them.  If  a 
market  is  in  a  bad  technical  or  general  con- 
dition, the  slightest  adverse  happening  may 
create  panic ;  while  if  the  foundation  is  sound, 
even  a  great  calamity,  such  as  the  San  Fran- 
cisco earthquake,  will  cause  only  a  temporary 
halt.  The  man  who  speculates  correctly  has 
little  to  fear  from  accidents. 


In  the  following  section  of  this  work,  the 
writer  has  undertaken  to  touch  on  such  feat- 
ures as  appear  of  most  interest  and  benefit  to 
the  speculator  or  investor.  Some  of  the  mat- 
ter presented,  such  as  the  question  of  dividend 
dates,  will  appear  to  many  readers  so  simple 
as  to  be  unnecessary,  but  it  is  true,  neverthe- 
less, that  many  very  elementary  facts  are  mis- 
understood or  unappreciated  by  a  large  class 
of  public  participators. 


VI 

Puts  and  Calls 

Puts  and  Calls,  or  "privileges,"  have  long 
been  popular  with  a  certain  trading  element, 
either  as  a  protection  against  loss  in  commit- 
ments already  made,  or  as  a  positive  method  of 
trading. 

The  theory  and  operation  of  privileges  may 
be  easily  understood  by  considering  them  in 
the  light  of  insurance,  the  money  paid  for  them 
as  a  premium,  and  the  funds  received  in  case 
the  privilege  is  exercised,  as  a  loss  paid  by  the 
insurance  company.  It  will  be  understood, 
that  in  speaking  of  the  seller  of  puts  or  calls, 
the  insurance  company  is  referred  to,  and  that 
the  buyer  represents  the  insured  party. 

The  buyer  of  a  call  has  the  right  to  call  for 
his  shares  or  commodity,  at  the  price  named  in 
the  contract  at  any  time  before  its  maturity. 
The  seller  of  a  call  fixes  a  certain  price  at  which 
he  agrees  to  deliver  stock,  specifies  the  duration 
or  time  limit  of  the  contract,  and  receives  from 
the  buyer  a  certain  sum  or  premium. 

For  example:  United  States  Steel  Common 

89 


90         THE  CYCLES  OF  SPECULATION 

is  selling  at  $40  per  share;  A,  the  seller,  offers 
a  call  on  $100  shares  at  43,  good  for  ten  days, 
at  a  price  of  say,  $100.  B,  the  purchaser,  pays 
the  $100  and  receives  a  contract  from  A  as 
specified  above.  Now  suppose  that  at  any 
time  before  the  expiration  of  the  period  named. 
Steel  Common  advances  to  50.  B  can  call  for 
the  delivery  of  100  shares  of  Steel  at  43,  and 
by  selling  it,  reaps  a  profit  of  $700,  less  the  cost 
of  the  privilege,  ($100),  and  the  brokerage. 
Used  as  a  protective  measure  on  short  sales, 
the  result  would  be  the  same,  as  $700  would 
have  been  saved.  That  is  to  say,  if  A  is  short 
of  Steel  at  40  and  it  advances  to  50,  his  call 
has  acted  as  insurance  against  any  loss  over 
and  above  the  $300  represented  by  the  rise 
from  40  to  43. 

The  "put"  is  exactly  the  reverse  of  the  "call," 
and  is  insurance  against  a  decline;  or,  in  other 
words,  an  agreement  to  receive  shares  at  a 
specified  price  on  or  before  a  certain  date. 

Using  the  same  illustration  as  before,  let  us 
assume  that  the  price  of  Steel  Common  is  40, 
and  that  A,  the  seller,  offers  a  put  at  37,  good 
for  10  days,  at  a  price  of  $100.  B,  the  buyer, 
is  now  insured  against  any  loss  which  may 
accrue  through  a  decline  below  37  in  the  en- 
suing ten  days.  If  he  is  long  of  the  stock  and 
it  declines  to  30,  he  may  deliver  his  shares  to 
A  at  37,  or  if  he  has  purchased  the  "put"  as  a 


PUTS  AND  CALLS  91 

speculation,  he  may  buy  100  shares  in  the 
market  at  30  and  deliver  to  B  at  37,  netting  a 
profit  of  $700,  less  the  price  paid  for  "put"  and 
brokerage. 

One  of  the  favorite  methods  of  trading  in 
privileges  is  to  buy  or  sell  against  them  when 
the  price  named  is  reached.  For  example,  say 
B  holds  a  ten  day  "put"  on  Steel  Common  at 
37,  and  the  market  for  the  stock  declines  to  36 
in  five  days.  He  may  now  buy  100  shares  at 
36  on  the  theory  that  he  has  regained  his 
original  outlay  of  $100  and  has  a  possibility  of 
profit  through  market  action  in  the  remaining 
five  days,  while  there  is  no  possibility  of  loss. 
If  the  market  advances  to,  say  38,  he  may  sell 
the  one  hundred  shares  purchased,  and  on  an- 
other decline  to  37  or  36  may  again  purchase, 
repeating  the  operation  indefinitely  during  the 
life  of  his  put.  The  "Call"  is,  of  course,  made 
the  basis  of  short  sales  on  an  exact  reversal  of 
this  process.  This  fashionable  form  of  exer- 
cising privileges  is  facilitated  by  the  fact  that 
"puts  and  calls"  issued  by  members  of  the  New 
York  Stock  Exchange,  are  generally  accepted 
by  brokers  as  "margins";  B  having  paid  A  $100 
for  a  "put,"  as  illustrated  above,  could,  if  Steel 
declined  to  37  or  below  that  figure,  buy  100 
Steel  and  give  his  broker  the  privilege  issued 
by  A,  in  lieu  of  a  marginal  deposit.  The  broker 
is  satisfied,  as  he  gains  a  commission,  and  in 


92         THE  CYCLES  OF  SPECULATION 

the  event  of  a  further  decline  in  the  price  of 
Steel  can  call  on  A  to  receive  the  stock  at  37 
when  the  option  expires. 

Another  popular  form  of  trading  in  privileges 
is  to  buy  or  sell  half  the  amount  named  in  the 
privilege  when  it  becomes  "good"  through 
market  action.  If  B  holds  a  "put"  on  100  Steel 
at  37,  he  may,  at  that  price  or  below,  buy  50 
shares.  He  is  now  in  a  position  to  profit  by 
either  an  advance  or  a  decline.  If  the  price  ad- 
vances to  40  he  has  three  points  profit  in  the 
50  shares  purchased.  If,  on  the  other  hand,  the 
market  declines  to  34,  he  still  gains  3  points  on 
50  shares,  for  his  "put"  protects  him  against  a 
loss  in  the  50  shares  purchased  and  he  can  pur- 
chase another  50  shares  at  34  and  deliver  to  A 
at  37.  In  short,  when  he  makes  his  50  share 
purchase  at  37,  he  is  both  short  and  long  of  the 
stock  and  must  gain  on  a  movement  either  way 
in  the  market  price. 

A  "Straddle,"  as  the  term  is  applied  to  privi- 
leges, is  a  combined  "put  and  call'.*  The  pur- 
chaser gains  on  a  movement  in  either  direction. 
The  general  rule  is  that  the  gain  is  to  be  repre- 
sented by  a  market  change  representing  an  ex- 
cess of  the  amount  paid  for  the  'Straddle." 
Thus  if  A  sells  to  B  for  $250,  a  straddle  on  100 
shares  of  Steel,  when  the  current  market  for 
the  stock  is  40,  B  is  in  a  position  to  gain  by 


PUTS  AND  CALLS  9S 

either  an  advance  above  42^/2  or  a  decline  be- 
low 37^. 

The  purchasers  of  privileges  are  sometimes 
perplexed  by  market  changes  which  are 
brought  about  by  dividend  payments.  The 
rule  is  that  the  dividend  always  goes  with  the 
stock.  The  simplest  way  to  arrive  at  correct 
figures  is,  to  mentally  lower  the  price  of  either 
the  "put"  or  "call,"  by  the  exact  amount  of  the 
dividend  payment.  Thus,  if  B  holds  a  "call" 
on  Steel  at  43  and  a  dividend  of  2%  is  paid  on 
the  stock  during  the  life  of  his  option,  his  "call" 
becomes  operative  at  41  as  the  dividend  goes 
to  him.  If  he  holds  a  "put"  at  37,  and  2%  divi- 
dend is  paid  on  the  stock,  his  "put"  is  not  oper- 
ative until  35  is  reached,  as  the  dividend  goes 
to  the  maker  of  the  "put." 

Privileges  in  grain  or  other  commodities  are 
based  on  the  same  general  rules  and  principles 
as  those  on  stocks.  These  privileges  are 
heavily  dealt  in  on  wheat  and  corn  in  Chicago. 
They  are  designated,  however,  as  "ups"  and 
"downs"  in  order  to  evade  local  laws  prohibit- 
ing transactions  in  'puts  and  calls."  The  "ups" 
are  calls;  the  "downs"  are  puts.  Most  of  the 
grain  privileges  handled  in  Chicago,  or  based 
on  Chicago  prices,  are  of  a  day  to  day  char- 
acter, insuring  only  for  the  next  day's  price 
changes.  The  ordinary  charge  is  $1  per  thou- 
sand  bushels.      For   $1,    therefore,    the   small 


94  THE  CYCLES  OF  SPECULATION 

gambler,  or  speculator,  may  purchase,  say  a 
call  on  1,000  bushels  of  wheat  at  90J/2  when  the 
last  price  recorded  was  90.  If  wheat  reaches 
91^  during  the  next  day's  session,  he  has  a 
gain  of  $10  less  the  cost  of  the  "call"  and 
brokerage. 

The  small  capital  required  for  this  form  of 
trading,  the  fact  that  loss  is  limited  to  the 
original  cost  of  the  privilege,  and  the  great  pos- 
sibilities in  case  of  extreme  movements,  make 
"puts  and  calls"  very  popular.  It  may  be  said, 
however,  that  they  are,  as  a  rule,  poor  prop 
erty.  The  writer  kept  account  of  the  transac- 
tions in  "puts  and  calls"  handled  through  a 
large  concern  for  almost  two  years  and  found 
that  only  about  35%  of  the  money  paid  for 
these  privileges  returned  to  the  purchasers. 
That  is  to  say,  the  profit  shown  to  purchasers 
of  "puts,"  "calls,"  and  "straddles,"  was  only 
about  $350  out  of  each  $1,000  received  by  the 
sellers.  After  deducting  the  item  of  commis- 
sion charges,  it  was  found  that  the  sellers  of 
privileges  reaped  over  50%  profit  each  year. 
The  experiment  referred  to  was  based  on  grain 
privileges,  but  would  probably  hold  good  in 
stocks.  The  sellers  of  these  "puts  and  calls" 
are  among  the  brightest  men  in  the  street,  and 
when  they  make  prices  they  do  so  on  the  abso- 
lute basis  that  they  have  the  best  of  the  bar- 
gain and  the  buyers  are  usually  a  public  ele- 


PUTS  AND  CALLS  95 

ment.  In  the  test  referred  to,  there  were 
never  three  consecutive  days  when  either 
"puts"  or  "calls"  were  good.  There  was  on 
one  occasion  in  the  period  consulted,  an  ad- 
vance of  over  20  cents  a  bushel  in  wheat  in 
three  days,  but  "calls"  were  good  only  on  the 
first  day  of  the  advance.  On  this  occasion  the 
"calls"  were  good  for  about  2  cents  per  bushel 
on  the  first  day's  rise,  but  the  sellers  offered 
nothing  for  the  second  day,  except  at  prices  far 
above  the  market,  and  although  the  market  ad- 
vanced 6  cents  per  bushel,  wheat  was  not 
"called."  On  the  third  day,  prices  for  "calls" 
were  prohibitive,  ranging  from  ten  to  twenty 
cents  above  the  closing  price  and  again  wheat 
was  not  called,  although  the  market  advanced 
8^2  cents. 

In  the  accounts  examined,  one  seller  of  privi- 
leges on  wheat  had  an  open  order  to  sell  100 
puts  and  100  calls  every  day  at  the  ruling 
price.  He  thus  received  $200  daily  and  invari- 
ably "took  his  loss"  whenever  the  privileges 
operated  against  him.  That  is  to  say,  if  wheat 
closed  one  cent  per  bushel  above  the  call  price, 
he  would  be  called  for  100,000  bushels  on  his 
privileges,  making  him  short  that  amount  of 
wheat.  This  he  bought  in  at  once  and  pocketed 
a  loss  of  $1,000  less  the  $200  received.  Al- 
though he  accepted  some  severe  losses   now 


95  THE  CYCLES  OF  SPECULATION 

and  then,   his   account   showed   over   $30,000 
profit  on  a  year's  business. 

Another  account  was  operated  on  a  different 
principle  by  the  seller  of  privileges  and  re- 
sulted in  even  larger  profits.  This  individual 
would  sell  ten  "puts"  and  ten  "calls"  on  wheat 
each  day.  In  the  event  of  his  being  called,  i.e.. 
short  of  the  wheat,  he  would,  on  the  next  day 
sell  no  "calls,"  but  20  "puts."  In  the  event  of 
a  decline  below  the  "put"  price,  he  had  enough 
short  wheat  to  protect  ten  of  his  "puts"  and  in 
reality  automatically  close  out  his  ten  thousand 
short,  frequently  at  a  profit.  As  has  been 
stated,  his  profits  were  greater  than  in  the  first 
instance  quoted.  There  was,  of  course,  a  more 
highly  speculative  element  in  his  form  of  oper- 
ating than  in  the  other  method,  but  the  oper- 
ator was  never  either  long  or  short  more  than 
10,000  bushels,  and  received  about  $6,000  a 
year  or  60  cents  per  bushel  from  his  privileges, 
in  addition  to  the  accruing  of  profit  or  the  cur- 
tailing of  loss  by  his  mechanical  method. 

In  the  accounts  examined  the  persistent  pur- 
chasers of  privileges  all  finally  lost  money,  ex- 
cept in  a  few  cases  where  lines  acquired  on 
"puts  or  calls"  were  carried  to  a  successful 
conclusion  in  the  course  of  time.  That  is,  a 
purchaser  of  "calls,"  finding  a  profit  in  his 
privilege,  would  call  the  wheat  and  keep  it. 
This,  however,  resolved  the  matter  into  pure 


PUTS  AND  CALLS  97 

speculation,  as  the  maximum  benefits  derived 
from  this  form  of  trading  can  only  be  correctly 
measured  by  the  profit  shown  at  the  expiration 
of  the  "put"  or  "call."  That  is  to  say,  the 
seller  need  suffer  no  greater  loss  than  that 
shown  when  the  contract  he  has  given  matures, 
and  consequently  the  profit  to  the  buyer  can- 
not be  greater  except  through  speculation. 

It  would  appear  from  these  facts,  that  the 
purchasing  of  privileges  is  a  poor  business 
proposition,  while  the  selling  of  privileges  is  a 
money  making  affair.  This  is  true.  We  need 
only  compare  the  kind  of  men  who  buy  "puts 
and  calls"  and  those  who  sell  them  to  have  this 
truth  made  apparent.  The  late  Russell  Sage 
was  a  persistent  writer  of  these  instruments 
and  made  a  great  deal  of  money  by  the  pro- 
cess. The  late  Edward  Partridge  also  made  a 
good  deal  of  money  in  this  manner  in  the 
Chicago  Wheat  Market.  He  also  used  privi- 
leges to  aid  his  manipulative  campaigns.  On 
several  occasions,  he  sold  "calls"  heavily 
through  the  day,  then  suddenly  bid  wheat  up 
just  at  the  close  of  the  market,  effecting  a 
closing  just  above  the  call  price.  The  scat- 
tered purchasers  would  call  the  wheat  and  put 
Mr.  Partridge  short  several  millions  at  a  high 
price,  which  was  just  what  he  wanted.  He 
could  not  have  sold  as  much  wheat  in  the  open 
market    without    breaking    the    price    several 


98  THE  CYCLES  OF  SPECULATION 

cents.     On  the  same  principle,  he  used  some- 
times to  sell  a  great  many  "puts"  when  he 
wished  to  cover  a  line  of  short  wheat  and  rush 
the  price  downward  at  the  close,  thus  enabling 
him  to  purchase  a  great  line  without  disturbing 
the  market  by  bidding  for  it.    The  process  only 
worked  a  few  times,  however.    As  soon  as  it 
was  discovered  it  failed,  as  the  call  price,  when 
reached,  met  with  such  a  wave  of  selling  that 
it  was  impossible  to  break  through  it,  and  the 
manipulator  was  "hoist  with  his  own  petard." 
There  is  another  drawback  to  the  habit  of 
buying  privileges — a  mental  one.     They  are 
frequently  made  the  basis  of  positive  trading 
with  disastrous  results.  The  man  who  believes 
in  an  advance  in  certain  shares  or  commodities, 
frequently  purchases  privileges  instead  of  fol- 
lowing out  his  own  convictions  by  actual  trad- 
ing.   Thus  the  man  who  had  good  reasons  for 
expecting  an  advance  in  wheat  at  the  time  of 
the  20  cent  advance  mentioned  above,  and  who 
used  either  "puts"  or  "calls"   or  both,   as  a 
means  of   operating   on   his   opinions,   would 
have  reaped  less  than  two  cents  a  bushel  during 
an  advance  of  twenty  cents.     He  might,   of 
course,  have  called  the  wheat  on  the  first  day 
of  the  advance  and  remained  long,  but  in  that 
case  he  would  merely  have  been  speculating 
with  equal  chance  of  loss  or  profit  in  ensuing 
transactions.    Aside  from  the  initial  two  cent 


PUTS  AND  CALLS  99 

gain,  he  would  have  been  in  no  different  po- 
sition than  if  he  had  purchased  and  held  the 
cereal  on  margin. 

It  is  the  writer's  opinion,  founded  on  the  ex- 
perience set  forth  above,  that  it  is  much  better 
to  effect  transactions  in  the  ordinary  manner, 
than  to  depend  on  privileges.  If  "puts  and 
calls"  are  dealt  in  at  all,  they  should  be  sold, 
not  purchased.  The  insurance  companies  make 
more  money  than  is  paid  out  in  losses;  so  do 
the  sellers  of  privileges.  It  may  be  well  to  add, 
however,  that  the  man  who  runs  an  insurance 
company  is  in  danger  if  he  does  not  understand 
his  business  and  his  risks,  or  if  he  enters  the 
field  without  sufficient  capital  to  provide  for 
possible  initial  losses.  All  this  applies  to  the 
seller  of  privileges. 


VII 

The  Question  of  Dividends 

It  is  a  certainty  that  the  short  seller  of  divi- 
dend-paying stocks  suffers  a  drawback  from 
dividends,  except  in  the  rare  cases  where  in- 
terest is  allowed  on  short  stocks.  If  we  sell 
short  a  6%  stock  at  par  and  at  the  end  of  a 
year  find  the  stock  still  selling  at  par,  we  have 
lost  6%  without  adverse  market  action.  This 
onus  cannot  be  escaped  by  short-time  commit- 
ments; it  is  merely  a  matter  of  degree.  The 
chronic  short-seller  is  swimming  constantly 
against  the  current. 

There  is  one  point  about  dividends  which  is 
widely  misunderstood  by  ordinary  traders.  It 
appears  impossible  to  make  a  great  many  in- 
dividuals understand  that  short  sales  may  be 
as  intelligently  made  the  day  before  a  stock 
sells  "ex-dividend"  as  at  any  other  time.  Even 
when  good  reasons  for  a  decline  exist,  traders 
fight  shy  of  "swallowing  the  dividend,"  or  re- 
tire commitments  just  before  dividend  pay- 
ment for  no  other  reason  than  that  such  dis-* 


101 


102       THE  CYCLES  OF  SPECULATION 

tribution  is  to  be  made,  which  is,  in  fact,  no 
reason  at  all. 

The  disadvantage  to  the  seller  of  stocks 
through  the  earning  capacity  or  increment  is 
the  same  on  the  day  or  the  week  preceding  a 
disbursement  as  at  any  other  time.  The  earn- 
ings of  the  company  are  a  steady  day  to  day 
affair,  and  are,  as  they  accrue,  constantly  con- 
sidered in  the  price  of  the  stock.  In  other 
words,  the  prices  of  listed  shares  are  at  all 
times  "flat."  At  a  point  midway  between  two 
dividend  days,  the  stock  reflects  in  its  current 
price  half  the  amount  of  the  undistributed  divi- 
dend, or  other  increment.  For  example,  if  a 
certain  stock  sells  normally  at  par  and  pays  6% 
per  annum  (3  per  cent,  in  January  and  3  per 
cent,  in  July)  the  price  of  the  stock  in  March, 
eliminating  speculative  influences,  would  be 
1011^  and  in  July  103.  When  on  July  1st,  the 
3  per  cent,  is  distributed,  the  amount  is  simply 
taken  away  from  the  company  and  from  the 
price  of  the  stock  also.  It  now  returns  to  its 
normal  price,  100,  and  whether  it  will  go  up  or 
down  from  that  point  is  a  question  for  specu- 
lation. The  factor  which  made  the  price  103 
has  been  eliminated  and  it  remains  for  the  cor- 
poration in  question  to  again  earn  3%  available 
for  distribution  before  the  next  dividend  day. 

Perhaps  this  point  may  be  made  clearer  by 
assuming  that  a  certain  stock  is  not  handled 


THE  QUESTION  OF  DIVIDENDS        103 

on  the  "flat"  basis,  but  is  dealt  in  "and  inter- 
est" after  the  method  sometimes  employed  in 
bond  transactions.  Let  us  again  eliminate 
speculation  and  take  for  example  a  stock  sell- 
ing at  100  and  paying  6%.  Assuming  that  a 
dividend  had  been  paid  on  this  stock  on  Janu- 
ary 1st,  the  purchaser  of  the  stock  on  February 
1st  would  pay  100  for  his  shares,  and  would 
also  pay  to  the  seller  the  accrued  dividend  for 
one  month,  or  ^  of  1%  which  is  exactly  the 
same  proposition  as  if  the  stock  had  been 
quoted  flat  on  the  Stock  Exchange  at  100^/^. 
On  March  1st,  the  purchaser  would  pay  100 
for  his  shares  and  1%  accrued  dividend  or 
101,  etc. 

It  appears,  therefore,  that  the  widespread 
idea  that  it  is  dangerous  to  sell  a  stock  just 
before  a  dividend  day  is  not  sound.  In  fact, 
the  whole  matter  may  be  dismissed  by  saying 
that  if  there  was  any  good  or  logical  reason  for 
expecting  a  premature  recovery  of  the  price  of 
dividend-paying  shares,  or  an  advance  founded 
on  any  reason  in  connection  with  dividends 
other  than  the  gradual  accumulation  from  one 
date  of  disbursement  to  the  next,  the  whole 
problem  of  making  profits  in  Wall  Street 
would  be  solved.  The  rule  must  necessarily 
work  both  ways,  and  if  it  is  dangerous  to  sell 
at  certain  periods,  it  must  be,  in  inverse  ratio, 
safe  to  purchase.     All  we  would  need  to  do 


104        THE  CYCLES  OF  SPECULATION 

therefore,  would  be  to  await  the  dates  on 
which  shares  sold  "ex-dividend"  and  make  pur- 
chases. Here  then,  is  exploited  a  patent  way 
of  getting  the  best  of  the  market  without  study 
or  effort.  In  truth,  there  is  nothing  whatever 
in  the  theory  any  more  than  there  would  be  in 
buying  Government  bonds  for  a  rise  just  after 
the  interest  had  been  paid  on  them.  If  good 
reasons  exist  for  sales,  they  may  be  made  as 
confidently  at  one  time  as  another.  The  dis- 
advantage of  being  short  of  dividend-paying 
stocks  is  always  present,  and  it  cannot  be  es- 
caped, but  the  operation  is  a  day  to  day  affair 
not  a  matter  of  certain  dates. 


Basing  Railroad  Values. 


"The  problem  of  railway  valuation  is  compara- 
tively simple,  and  beyond  the  reach  of  but  few.  A 
railway  is  primarily  a  carrier,  a  carter,  a  drayman. 
Obviously  then,  in  considering  an  investment,  we 
shall  ask,  What  sort  of  a  road  has  it?  What  sort 
of  vans,  and  what  sort  of  horses?  What  sort  of 
trade?  A  teamster  doing  business  on  a  fine  level 
macadamized  road,  with  big,  heavy  vans,  and  heavy 
draft  horse,  can  work  at  a  profit  and  underbid  a 
carrier  with  old  vans  and  poor  horses,  working  on 
roads  of  heavy  grade.  So,  for  example,  a  railroad, 
other  things  being  equal,  with  a  water  grade  like 
the  New  York  Central,  has  a  tremendous  advantage 
over  an  up  and  down  grade  like  that  of  the  Erie. 


THE  QUESTION  OF  DIVIDENDS        105 

The  Illinois  Central  can  do  business  much  more 
cheaply  than  the  Missouri  Pacific.  A  road  with  a 
magnificent  equipment  like  the  Lake  Shore  can  un- 
dercut a  poorly  equipped  road  like  the  Nickel  Plate. 
"The  initial  facts  that  we  wish  to  know  of  a  rail- 
way then  are,  What  sort  of  a  road  has  it,  what  is 
its  traffic,  does  it  get  good  rates?  When  we  know 
what  business  it  does,  what  its  earnings  are,  then 
we  shall  ask,  how  is  it  capitalized,  what  are  the  fixed 
charges  these  earnings  have  to  bear,  what  is  there 
left,  and  what  is  the  amount  of  stock  which  has  to 
share  the  surplus?  We  shall  ask  if  its  earnings  are 
stable,  if  the  maintenance  is  adequate,  if  the  policy 
of  the  road  is  conservative,  if  its  management  is 
good  or  bad.  When  we  have  done  all  this,  then  we 
shall  go  into  the  market,  ask  the  prevalent  rate  of 
money,  and  by  a  simple  rule  of  thumb,  we  shall 
know,  in  a  broad  way,  whether  the  stock  is  cheap  or 
dear." — From  "American  Railways  as  Investments," 
by  Carl  Snyder. 


The  Effects   of   Business   Depression   on   Rails   and 
Industrials. 


"There  is  apparently  a  popular  belief  that  the 
general  market  always  moves  together  in  a  consid- 
erable swing,  and  that  any  advance  in  one  set  of 
stocks  would  be  accompanied  by  a  corresponding 
advance  in  others.  So  far  as  the  general  tone  of  a 
day's  market  is  concerned  this  is  true;  but,  never- 
theless, individual  stocks  or  groups  of  stocks  can 
easily  and  gradually  change  their  selling  basis  in  a 
brief  period  of  time.  In  1901,  for  example,  the  in- 
dustrial stocks   reached  their   high   levels,   and  suf- 


105        THE  CYCLES  OF  SPECULATION 

fered  a  considerable  decline  in  1902.  Meanwhile  the 
rails  were  advancing.  To  illustrate  and  confirm  this 
statement  the  highest  prices  of  both  Rails  and  In- 
dustrials in  July,  1907,  and  July,  1902,  are  set  forth 
in  the  following  tables.  There  can  be  no  unfairness 
in  choosing  this  particular  period.  What  is  to  be 
demonstrated  is  that  it  is  possible  for  the  groups  to 
cross  each  other  in  price  in  a  given  time.  The  ten 
most  active  stocks  have  been  chosen  in  each  group 
as  fairly  representative  of  the  entire  market: 

RAILROAD  STOCKS. 

High  in  High  in 

Stock                  July,  1 901  July,  1902 

Atchison 89I  95I 

B.  &  O io8|  112J 

Can.  Pac 108J  139J 

St.  Paul i77i  i89f 

Erie 43f  39i 

L,  &  N Ill  145I 

Mo.  Pac I2i|  ii9i 

Penna 151I  i6i| 

Reading 47  69  J 

Union  Pacific iio|  iiof 

Average  price 102.97        118.41 

INDUSTRIAL  STOCKS. 

High  in  High  in 
Stock                                            July,  1901  July,  1902 

Amalgamated 124^  68| 

American  Smelting 58  47I 

American  Sugar 145!  134^ 

Anaconda 48I  27 

Col.  Fuel  &  Iron ii6|  102J 

National  Lead 23  22  j 

Tenn.  Coal  &  Iron 72^  69J 

Rubber 2i|  17 

U.  S.  Steel 48!  41 

U.  S.  Steel,  Pfd 99i  92 J 

Average  price 75-8o  62.18 


THE  QUESTION  OF  DIVIDENDS        107 

"These  tables  show  that  during  the  fiscal  year 
used,  railroad  stocks  advanced  an  average  of  over 
15  points,  while  industrials  declined  almost  14  points. 
In  other  words,  the  spread  was  29  points.  The  man 
who  bought  rails  and  sold  industrials  would  have 
made  on  the  average  29  points.  This  exhibit  entirely 
overthrows  any  argument  that  the  market  moves 
one  way  or  the  other  homogeneously. 

"There  was  a  reason  for  the  spread  illustrated 
above.  There  always  is  a  reason.  We  had  big  crops 
in  1902,  which  helped  the  railroads.  The  industrials, 
on  the  other  hand,  were  busily  discounting  the  busi- 
ness depression  of  1903. 

"Precedent  shows  that  in  a  period  of  general  de- 
pression Industrial  stocks  suffer  about  33%  more 
than  rails.  That  is  to  say,  in  the  high  and  low  prices 
covering  a  long  period,  industrial  securities  should 
show  a  distinctly  greater  pro-rata  of  decline.  Let 
me  illustrate,  using  the  stocks  employed  in  the 
former  table  and  covering  the  period  of  our  last 
great  cycle,  1901-02-03.  As  most  of  the  high  prices 
in  rails  were  made  in  1902,  the  highest  prices  of 
both  1901  and  1902  will  be  used,  and  the  lowest  of 
1903: 

RAILROAD  STOCKS 

High  in        Low  in 
1901-1902        1903 

Atchison 96f  54 

B.  &  O ii8i  7if 

Can.  Pac i45i  "Sl 

St.  Paul 198J  i33i 

Erie 45i  23 

L.  &  N iSQJ  95 

Mo.  Pac i25i  85i 

Penna 170  iioj 

Reading 78^  37i 

Union  Pac 133  65I 

Average  price 127.11  79.22 


108        THE  CYCLES  OF  SPECULATION 

INDUSTRIAL  STOCKS. 

High  in  Low  in 

1901-1902  1903 

Amalgamated 130  33! 

Am.  Smelter 69  36J 

Am.  Sugar 153  107I 

Anaconda 54J  25I 

Col.  F.  &  1 136I  24 

Nat'l  Lead 32  loj 

Tenn.  Coal  &  1 76f  25I 

U.  S.  Rubber 34  7 

U.  S.  Steel 55  10 

U.  S.  Steel,  Pfd ioi|  49J 


Average  price 84.22  33.01 

"It  will  be  observed  from  the  above  table  that  In- 
dustrials declined  about  51  points  while  rails  de« 
clined  about  48  points.  But  the  decline  cannot  be 
figured  in  points.  The  higher  range  of  railroad 
shares  must  be  considered.  A  decline  of  two  points 
in  a  stock  selling  at  100  is  only  equivalent  to  a  de- 
cline of  one  point  in  a  stock  selling  at  50.  There- 
fore, in  order  to  get  a  correct  view  of  the  matter, 
we  must  reduce  the  decline  to  percentages.  On  this 
basis,  railroad  stocks  lost  about  38%  of  their  value, 
and  industrial  stocks  lost  about  60%  of  their  value." 
— From  Thomas  Gibson's  Market  Letter,  May  4th, 
1907. 

Undigested  Securities. 

"The  new  methods  and  the  new  projects  are  going 
through  the  test  of  fire  today,  and  some  of  them  are 
being  consumed.  The  tests  which  weeded  out  the 
badly  organized  and  incompetent  of  the  early  stock 
companies,  which  drove  to  the  wall  the  "wildcat" 
banks  of  ante-bellum  days,  and  which  wiped  out 
dividends  and  stock  rights  in  badly  managed  rail- 


THE  VALUE  OF  RIGHTS  109 

ways,  are  now  being  applied  to  the  new  forms  of 
organization  which  have  been  the  growth  of  the  past 
decade.  But  the  stronger  and  better  organized  of 
these  new  corporations  are  Ukely  to  meet  these 
trials  without  disaster,  or  to  modify  their  methods 
to  conform  to  the  teachings  of  experience,  until 
there  remains  to  the  financial  world  a  valuable  re- 
siduum of  new  methods  for  giving  flexibility  to  capi- 
tal and  promoting  its  transfer  promptly  and  effi- 
ciently from  the  industries  where  it  is  not  needed  to 
those  where  it  will  render  its  highest  service." — 
From  "Wall  Street  and  the  Country,"  by  Chas.  A. 
Conant. 

How  to  Compute  the  Value  of  Rights. 

"Inasmuch  as  the  method  of  computing  the  value 
of  rights  is  slightly  complicated,  an  illustration  may 
be  given.  Let  us  take  the  instance  of  St.  Paul  again, 
where  the  stockholders  were  allowed  to  subscribe 
to  23%  of  their  holdings  to  new  stock  at  par.  The 
common  stock  was  at  that  time  selling  a  little  below 
$200  per  share.  Let  us  take  the  round  figure,  and 
the  operation  is  as  follows: 

One  hundred  shares  at  $200  per  share  equals .  $20,000 
Twenty-three  shares  at  $100  equals 2,300 


Total  cost  of  123  shares $23,300 

"Average  cost,  $181  per  share. 

"Deducting  $181  from  the  market  quotation  leaves 
$19,  the  value  of  the  rights  on  each  share  of  St.  Paul 
stock.  As  a  matter  of  fact,  the  selling  price  was  a 
little  below  $200,  and  the  highest  price  of  the  rights 
fell  a  little  below  $19  per  share. 

"In  other  words  the  process  is  simply  to  take  the 
number  of  new  shares  per  hundred  shares  of  the 


110        THE  CYCLES  OF  SPECULATION 

original  holding  to  be  subscribed  for,  and  add  the 
value  of  these  new  shares  at  the  subscription  price 
to  the  cost  of  one  hundred  shares  at  the  market 
price;  then  divide  the  total  cost  of  both  old  and  new 
shares  by  the  total  number  of  shares,  and  deduct  the 
average  price  from  the  market  quotations.  This 
gives  the  selling  value  of  the  rights." — From  "Amer- 
ican Railways  as  Investments,"  by  Carl  Snyder. 


Barometer   of   Averages. 

"In  order  to  facilitate  the  examination  of  proper- 
ties and  their  comparative  condition,  the  following 
table  has  been  prepared.  The  figures  were  arrived 
at  by  averaging  the  operating  expenses,  fixed 
charges,  margin  of  safety,  and  dividends  of  principal 
properties  for  the  last  fiscal  year.  The  stock  prices 
are  based  upon  the  closing  figures  of  June  6,  1907. 
The  margin  of  safety  shown,  is  the  margin  over 
common  dividends.     Results  were  as  follows: 

Average  operating  expenses 69.01  % 

Average  fixed  charges 54-7o% 

Average  margin  of  safety 5-28% 

Average  dividend  common 6.03  % 

Average  price  of  stock i  .09 1 

"As  in  all  computations  of  this  kind  the  figures 
are  comparative  and  not  basic.  The  fact  that  one 
stock  is  in  a  much  better  position  than  others  does 
not  necessarily  mark  that  stock  as  a  purchase,  for 
all  stocks  may  be  too  high,  and  underlying  condi- 
tions may  not  warrant  purchases  in  any  quarter. 
Again,  we  must  always  consider  the  fact  that  im- 
portant elements  which  cannot  be  tabulated  in  fig- 
ures may  be  present.  However,  the  table  possesses 
value  as  a  rough  barometer,  and  after  it  has  been 


BAROMETER  OF  AVERAGES  111 

broadly  applied,  specific  influences  may  be  given 
due  consideration.  If,  for  example,  we  find  a  com- 
mon stock  selling  well  below  lOQS/^,  with  operating 
expenses  below  69.01;  fixed  charges  below  54.70; 
margin  of  safety  above  5.28  and  the  dividend  rate 
above  6'/( ,  we  have  a  remarkable  combination  of 
facts  favoring  the  shares  and  investigation  will  be 
stimulated.  The  figures  vary  widely  at  times  in 
different  corporations  and  cannot  always  be  con- 
sidered either  bullish  or  bearish  ,as  the  good  or  bad 
features  may  be  already  discounted  in  the  current 
price  of  the  shares.  It  may  also  be  found  that  one 
property  is  going  backward  gradually  while  another 
is  improving  its  position. — From  Thomas  Gibson's 
Market  Letter,  June  8th,  1907. 

The    Best    Method   of    Trading. 

"It  may  appear  that  if  the  market  is  to  sway  back 
and  forth,  sales  on  advances,  and  purchases  on  de- 
clines would  offer  the  maximum  of  opportunity  to 
the  shrewd  trader.  But  not  so.  To  illustrate  this, 
a  market  movement  from  high  to  low  prices  as 
shown  by  a  chart  is  presented  on  the  following  page. 

"As  simple  as  this  illustration  may  appear,  it  is 
worthy  of  most  earnest  consideration.  True,  the 
upward  and  downward  movements  show  opportuni- 
ties on  both  sides,  but  if  the  purchaser  makes  a  mis- 
take, as  all  speculators  will,  he  is  hopelessly  in- 
volved. If  he  buys  at  the  wrong  point  he  will  never 
see  daylight  during  the  progress  of  the  movement. 
Look  at  the  other  side  of  the  matter.  The  seller 
cannot  make  a  mistake.  No  matter  at  what  point  he 
sells  a  profit  lies  before  him.    A  little  reflection  will 


112        THE  CYCLES  OF  SPECULATION 
HIGH 


LOW, 

show  what  a  tremendous  difference  exists  here." — 
From  Thomas  Gibson's  Market  Letter,  Feb.  2nd, 
1907. 

Indications  of  Crises. 


"Preceding  Indications. — This  preceding  period  is 
characterized  by  well-defined  indications,  some  of 
which  develop  contemporaneously,  but  which,  so  far 
as  they  are  distinct  in  time,  occur  in  approximately 
the  following  order: 

"1 — An  increase  in  prices,  first,  of  special  commod- 
ities, then,  in  a  less  degree,  of  commodities  gener- 
ally, and  later  of  real  estate,  both  improved  and  un- 
improved. 

"2 — Increased  activity  of  established  enterprises, 
and  the  formation  of  many  new  ones,  especially 
those  which  provide  for  increased  production  or  im- 
proved methods,  such  as  factories  and  furnaces,  rail- 


INDICATIONS   OF   CRISES 


113 


ways  and  ships,  all  requiring  the  change  of  circulat- 
ing to  fixed  capital. 

"3 — An  active  demand  for  loans  at  slightly  higher 
rates  of  interest. 

"4— The  general  employment  of  labor  at  increas- 
ing or  well-sustained  wages. 

"5 — Increasing  extravagance  in  private  and  public 
expenditure. 

"6 — The  development  of  a  mania  for  speculation, 
attended  by  dishonest  methods  in  business  and  the 
gullibility  of  many  investors. 

"7 — Lastly,  a  great  expansion  of  discounts  and 
loans,  and  a  resulting  rise  in  the  rate  of  interest;  also 
a  material  increase  in  wages,  attended  by  frequent 
strikes  and  by  difficulty  in  obtaining  a  sufficient 
number  of  laborers  to  meet  the  demand." — From 
"Crises  and  Depression,"  by  Theodore  Burton. 

The  Ordinary  Swing  of  Prices  During  a  Cycle   of 
Speculation. 

UPWARD  SWING. 


EXTREME 
HIGHEST. 

100 
90 


80 

NORMAL 

VALUE. 

65 
45 

30 

20 
EXTREME 
LOWEST. 


A  long  period  of  backing 
and  filling;  public  buying,  and 
inside  liquidation. 

Excitement  and  inflation 
75";?  of  general  buying  done 
here. 

Good  buying  all  around. 
Public  interested. 

Opinions  mixed.  Public  be- 
ginning to  buy,  but  profes- 
sionals rather  bearish. 

Insiders  still  bidding  prices 
up.     Professionals  bearish. 

Insiders  bidding  for  stocks, 
public  skeptical. 

A  dull  market.  Insid- 
e  r  s  accept  all  offer- 
ings. 


n\        THE  CYCLES  OF  SPECULATION 


DOWNWARD  SWING. 


EXTREME 

HIGHEST. 

100 

90 


80 

NORMAL 

VALUE 

65 
45 


30 

20 
EXTREME 
LOWEST. 

— From  Thomas 
1907. 


A  long  period  of  backing 
and  filling;  public  getting 
tired  and  insiders  selling. 

Insiders  selling.  Much  bull 
talk,  dividend  increases,  etc. 
Some  averaging  by  people 
who  loaded  up  at  the  top. 

More  bull  talk.  More  aver- 
aging.    Insiders  still  selling. 

Many  weak  accounts  forced 
out  A  temporary  halt  and 
probably  a  big  rally. 

Insiders  pretty  well  out. 
The  wise  speculative  element 
consider  this  the  bottom  and 
load  up. 

General  blueness  and  pes- 
simism. 

A  dull  market.  Insid- 
e  r  s  accept  all  offer- 
ings 

Gibson's  Market  Letter,  May  11th, 


The  Factor  of  Safety. 

"There  remains  but  one  point  to  which,  in  view 
of  the  conditions  roughly  sketched  above,  the  writer 
would  call  especial  attention.  That  is,  that  the  in- 
vestor should  look  well,  always,  to  the  factor  of 
safety.  Before  he  puts  his  money  into  any  road, 
no  matter  if  it  be  on  the  recommendation  of  the 
greatest  banker  in  the  United  States,  let  him  con- 
sider how  far  that  company  is  prepared  to  v/eather 
a  storm.  Few  roads  ever  prospered  under  receiver- 
ship, no  matter  how  honest  or  how  able.  The  re- 
ceivership itself  is  a  handicap.  No  matter  how  high 
the  yield,  no  investor  whose  primary  regard  should 


THE  FACTOR  OF  SAFETY 


115 


be  the  safety  of  his  money  will  put  it  into  a  road 
whose  fixed  charges,  after  ample  charges  for  main- 
tenance, consume  much  more  than  50%  of  the  total 
net  income  available  for  interest,  dividends  and  im- 
provements— that  is,  save  in  exceptional  cases  like 
the  New  York  Central — and  until  he  has  satisfied 
himself  thoroughly  that  the  property  is  sound. 

"For  the  convenience  of  those  not  well  acquainted, 
the  following  list  of  the  principal  roads  is  given, 
with  the  percentage  of  total  net  income  consumed 
by  fixed  charges  in  the  highly  prosperous  fiscal  year 
of  1905: 

TABLE  OF  FIXED  CHARGES. 


Atch,,  Top.  &  S.  Fe.  .42% 
Atlantic  Coast  Line.  .57% 
Baltimore  &  Ohio.  .  .  .39% 

Boston  &  Maine 78% 

Canadian  Pacific 33% 

Central  of  Georgia.. .  .47% 
Cen.  R.  R.  of  N.  J.  .  .50% 
Chesapeake  &  Ohio.  .53% 

Chicago  &  Alton 73% 

Del.,  Lack.  &  West.  .38% 
Denver  &  Rio  Grande .  52  % 
Det.,  Tol.  &  Ironton.87% 
Du. ,  S.  S.  &  Atlantic  .115% 

Erie 66% 

Gr.  Rap.  &  Indiana.  .76% 

Grand  Trunk 65% 

Great  Northern 26% 

Hocking  Valley. ...      31% 

Illinois  Central 47% 

Iowa  Central 79% 

Kansas  City  South'n.54% 
L.  Erie  &  Western.  .  .69% 

Lehigh  Valley 46% 

Long  Island 101% 

L.  S.  &  M.  S 38% 

Louis.  &  Nash 54% 

Maine  Central 46% 

Michigan  Central.  .  .  .57% 


Chi.  &  East.  Illinois 
Chi.  &  N'western.  .  . 
Chi.,  Bur.  &  Quincy 
Chicago  Gt.  Western 
Chi.,  Mil.  &  St.  Paul 
C.,St.  P.,M.  &  O..  . 
C,  C,  C.  &  St.  Louis 
Col.  &  Southern.  .  .  . 
Delaware  &  Hudson 
N.  Y.,  Chi.  &  St.  L. 
N.  Y.,  N.  H.  &  H.  . 
N.  Y.,  O.  &  Wester;: 
Norfolk  &  Western. 
Northern  Central. .  .  . 
Northern  Pacific.  .  .  . 

Pennsylvania 

Pitts.  &  Lake  Erie .  . 
P.,  C,  C.  &  St.  L.  .  . 

Reading 

Rock  Island 

Rutland 

St.  L.  &  S.  Fran ... 
St.  L.  &  S'western. 
Seaboard  Air  Line . . 

Sou.  Pacific 

Southern 

Texas  &  Pacific 

Tol.,  St.  L.  &  S'w'n.  , 


.68% 

•39% 
•45% 

67% 
■32% 
■42% 
•69% 
•55% 
•40% 
•41% 
•48% 

53% 
.37% 
.28% 

29% 
38% 
11% 
54% 
45% 
83% 
69% 
82% 
76% 
78% 
49%, 
69% 
40% 
61% 


116        THE  CYCLES  OF  SPECULATION 


Minn.  &  St.  Louis.  .  .77% 
M.,St.  P.  &  S.  S.  M.  .44% 

M.,  K.  &T 75% 

Missouri  Pacific 60% 

N.  Y.  C.  &  H.  R 64% 


Union  Pacific 3i% 

Vandalia 54% 

Wabash 80% 

Wheel.  &  Lake  Erie. 90% 
Wisconsin  Central.  .  .69% 


Importance   of   Fixed   Charges  to  the   Investor. 

"The  high  degree  of  stability  imparted  to  interest 
payments  and  dividends  by  a  low  percentage  of 
fixed  charges,  and  the  high  degree  of  instability 
imparted  by  a  large  percentage,  is  so  elementary 
that  it  would  seem  to  need  no  emphasis.  And  yet 
this  item  is  habitually  disregarded  by  perhaps  90% 
of  bond  and  stock  buyers.  On  this  account  it  may 
be  worth  while  to  illustrate  by  simple  comparison 
the  effect  of  a  20%  decline  in  gross  or  net  earnings. 
We  will  compare  the  conditions  of  two  roads  whose 
fixed  charges  are  respectively  75%  and  25%  of  the 
total  net  income.  The  operation  would  be  as  fol- 
lows: 

Suppose  a  20%  Decline 

Say  Earnings $1,000,000        $800,000 

Exp.  (70%).  .  .  .        700,000  560,000 

Net $300,000        $240,000 

If  F.  C.  75%= 225,000  225,000 

Surplus  for  div $75,000         $15,000    (Case  I) 

Decrease 80% 

IfF.  C.  25%= 75,000  75,000 

Surplus $225,000        $165,000 

Decrease 26%   (Case  II) 

"It  will  be  seen  from  the  above  that  a  20%  de- 
cline in  the  net  earnings  would,  in  the  first  instance, 
mean  a  decrease  of  80%  in  the  surplus;  while  in  the 
second   case,   the   same   decline   would   mean   a   de- 


IMPORTANCE  OF  FIXED  CHARGES     117 

crease  of  only  26%  in  the  surplus — figures  which 
sufficiently  indicate  what  a  high  percentage  of  fixed 
charges  means. 

"In  this  connection  it  may  be  further  noted  that 
in  the  large  holding  companies,  like  the  Pennsyl- 
vania, the  New  York  Central,  the  Union  Pacific,  and 
others,  the  factor  of  safety  and  the  surplus  shown 
tends  to  be  relatively  more  stable  than  in  compa- 
nies largely  or  exclusively  dependent  upon  the  earn- 
ings of  their  own  roads.  This  is  due  to  the  general 
custom  of  American  Railways  of  paying  out  in  divi- 
dends only  a  part  of  the  actual  surplus  earned. 
From  this  it  results  that  dividends  are  much  more 
stable  than  earnings,  and  that  the  income  of  the 
holding  companies  from  this  source  will  corres- 
pondingly show  smaller  fluctuations  than  earnings. 
When,  therefore,  as  in  the  case  of  some  of  the  large 
holding  companies  named,  the  income  from  invest- 
ments represents  a  considerable  portion  of  the  total 
net  income  shown,  the  surplus,  other  things  being 
equal,  will  be  much  more  stable  than  in  other  com- 
panies. 

"It  is  needless  to  add  that  this  stability  is  still 
further  heightened  when,  as  in  the  case  of  the  Penn- 
sylvania, Union  Pacific  and  some  other  roads,  the 
percentage  of  fixed  charges  is  at  the  same  time  low." 
— From  "American  Railways  as  Investments,"  by 
Carl  Snyder. 

Borrowing  and  Lending  Stocks. 


"When  a  speculator  sells  stock  which  he  does  not 
possess  (when  he  sells  it  short)  he  (or  what  is  the 
same  thing,  the  broker  who  acts  for  him)  has  to 
borrow  the  stock  to  make  delivery  to  the  purchaser. 
The   one  who  possesses  stock    (who  is  long  of  it) 


118       THE  CYCLES  OF  SPECULATION 

is,  in  ordinary  circumstances,  as  anxious  to  lend  it 
as  the  one  who  has  sold  it  short  is  anxious  to  bor- 
row it. 

"The  lender  of  stock  receives  from  the  borrower 
the  market  value  of  it  in  money,  but  except  when 
the  stock  is  lending  flat  (without  interest)  or  at  a 
premium,  the  lender  of  the  stock  pays  to  the  bor- 
rower of  it  interest  on  the  money  paid  for  the  stock 
by  the  borrower.  The  rate  of  interest  is  determined 
by  bid  and  offer. 

"On  the  New  York  Stock  Exchange,  brokers  who 
have  stocks  to  borrow  and  brokers  who  have  stocks 
to  lend  assemble  immediately  after  the  close  of  busi- 
ness on  the  exchange  and  those  who  needs  stocks 
borrow  amounts  necessary  to  make  deliveries  the 
next  day.  Those  who  neglect  to  borrow  at  this 
time  must  do  so  the  next  morning,  or  some  time  in 
the  day  before  the  delivery  hour,  2.15  p.  m.  There 
is  no  loan  crowd  in  the  morning,  but  borrowers 
seek  lenders  at  the  posts  on  the  floor  of  the  ex- 
change around  which  the  particular  stocks  that  they 
require  are  dealt  in. 

"The  same  rules  govern  the  receipt  and  delivery 
of  stocks  borrowed  and  loaned  as  govern  stocks 
bought  and  sold.  In  returning  borrowed  stock  the 
borrower  must  notify  the  lender  before  1  o'clock  on 
the  day  of  delivery;  the  lender  in  calling  or  demand- 
ing the  return  of  stock  must  do  likewise. 

"When  a  stock  is  loaned  flat^  the  owner  is  re- 
lieved from  the  cost  of  carrying  the  stock.  If 
loaned  at  a  premium  he  is  still  better  off,  for  the 
premium  is  so  much  gain.  When  a  stock  is  loaned 
at  a  premium,  the  premium  applies  in  the  absence 
of  a  renewal  of  the  loan  only  to  the  day  on  which 
the  stock  is  loaned. 

"If  a  stock  that  has  been  borrowed  advances  in 


BORROWING  STOCKS  119 

market  price  the  lender  may  require  the  borrower 
to  pay  to  him  the  difference  between  the  price  at 
which  the  stock  was  loaned  and  the  new  higher 
price.  On  the  other  hand,  if  the  stock  declines  in 
price  the  borrower  may  require  the  lender  of  the 
stock  to  return  to  him  the  difference  between  the 
price  at  which  the  stock  was  borrowed  and  the  new 
lower  price.  These  differences  are  called  market 
differences. 

"When  a  corner  is  being  worked  up  in  a  stock  it 
is  the  practice  of  those  engineering  it  freely  to  loan 
the  stock  in  order  to  encourage  the  creation  of  a 
short  interest  in  it.  When  this  short  interest  has 
become  large  enough,  or  in  other  words,  when  the 
stock  has  become  sufficiently  oversold,  a  demand  for 
the  return  of  the  stock  brings  the  corner  to  a  cul- 
mination. 

"An  apparent  borrowing  demand  for  stocks  is 
sometimes  created  by  the  efforts  of  money  lenders 
to  obtain  higher  interest  on  their  money  than  is  ob- 
tainable in  lending  it  in  the  money  market.  If  the 
lending  rate  for  a  particular  stock  is,  say,  6  per  cent, 
when  money  is  lending  at  AYz  per  cent,  in  the  money 
market  the  money  lenders  will  borrow  the  stock  in 
order  to  obtain  the  extra  interest. 

"When  a  seller  of  long  stock  (stock  actually 
owned)  desires  to  create  the  impression  that  he  is 
selling  short  stock  (stock  not  owned  or  possessed) 
he  has  his  broker  borrow  stock  for  delivery  to  pur- 
chasers. Then  when  he  has  completed  his  sales  he 
delivers  his  own  stock  to  the  onto  from  whom  his 
broker  borrowed. 

"Also,  when  a  seller  of  stock  desires  to  conceal 
his  identity,  he  has  his  stock  transferred  or  made  out 
in  the  name  of  his  broker,  or  a  clerk,  or  some  other 
person  previous  to  its  delivery  to  purchasers. 


120        THE  CYCLES  OF  SPECULATION 

"Arbitrage  dealers  often  sell  stock  held  abroad 
which  will  not  be  received  for  some  time.  They 
borrow  for  delivery  to  purchasers  and  when  their 
own  stock  arrives  they  make  returns  to  the  ones 
from  whom  they  borrowed. 

"Corporations  intending  to  issue  new  stock  have 
been  known  to  sell  the  stock  in  advance  of  its  is- 
suance and  to  borrow  to  make  delivery  to  pur- 
chasers. Then  when  the  new  stock  was  issued  it 
was  used  to  make  return  to  the  ones  from  whom 
stock  had  ben  borrowed." — From  Smith's  Financial 
Distionary,  by  Howard  Irving  Smith. 

Scalping. 

"There  are  many  different  methods  and  degrees 
of  scalping.  The  word  is  supposed  to  express  all 
the  forms  of  trading  between  the  "Chaser  of  eighths" 
and  the  man  who  operates  for  a  profit  of  several 
points. 

"Scalping  operations  are  more  common  than  any 
other  form  of  trading.  There  are  several  reasons 
for  this.  Many  people  consider  the  market  a  ma- 
chine, and  base  operations  on  pictures  of  the  past, 
i.  e.,  charts.  These  misused  and  mischievous  instru- 
ments show  so  many  opportunities  of  profit  in  move- 
ments both  ways,  that  the  unsophisticated  trader 
sees  what  was  possible,  while  the  probable  is  over- 
looked. 

"Again,  the  desire  to  scalp  is  helped  by  impatience 
and  greed.  The  small  trader  will  grow  disgusted 
if  there  is  the  slightest  delay.  Dullness  is  unbear- 
able to  him.  Also,  he  will  frequently  close  good 
commitments  merely  for  the  sake  of  'seeing  the 
money.'  I  have  seen  many  traders  'clean  up,'  receive 
a  check  which  was  of  absolutely  no  present  use  to 


SCALPING  .  121 

them,  gloat  over  it  for  a  while,  and  pay  another 
commission  to  replace  the  trades.  Ridiculous,  but 
true. 

"I  may  say,  as  a  general  principle,  that  I  consider 
scalping  the  poorest  form  of  trading.  It  involves 
the  continued  multiplication  of  commissions,  and 
constant  personal  attention.  I  know  of  but  two  men 
who  have  made  any  considerable  amount  of  money 
by  scalping  methods.  They  are  exceptionally  fitted 
for  this  form  of  trading,  and  have  the  ability  to  take 
a  small  loss  quickly.  This  is  a  trait  which  is  very 
rare  among  public  traders.  A  man  will  usually  ac- 
cept a  small  profit  for  no  other  reason  than  that  it 
is  a  profit,  and  will  sit  stubbornly  on  a  loss  for  no 
other  reason  than  that  it  is  a  loss. 

"The  man  who  has  reason  to  believe  that  a  stock 
will  advance  or  decline  ten  points,  will,  in  nine  cases 
out  of  ten,  realize  more  profit  by  merely  making  his 
trade  in  the  stock  and  going  about  his  business 
until  he  considers  it  wise  to  terminate  the  contract. 
I  will  say  decidedly  that  more  traders  will  do  bet- 
ter, make  more  money,  and  suffer  less  loss  of  time, 
and  less  annoyance  by  abandoning  scalping  tactics 
altogether. 

"This  view  will  no  doubt  cause  my  friends  in  the 
brokerage  business  much  wrath  and  indignation. 
They  naturally  prefer  to  have  ten  commissions 
rather  than  one,  and  I  fear  that  in  many  cases  they 
recommend  scalping  tactics  for  no  better  reason 
than  the  one  mentioned. 

"That  constant  and  repeated  operations  are  disas- 
trous, is  pretty  well  shown  by  the  remark  of  a  suc- 
cessful 'Bucket  Shop'  man:  'I  don't  care  what  they 
do,  or  what  the  market  does,  if  I  can  only  keep  them 
coming  up  to  the  order  windows  every  few  hours,* 


122        THE  CYCLES  OF  SPECULATION 

said  this  gentleman.  And  he  was  right;  for  the  or- 
dinary scalper  is  no  more  than  a  gambler,  basing 
his  operations  on  possible  variations,  and  paying 
a  great  percentage. 

"But  if  one  will  insist  on  scalping,  it  may  be  well 
to  examine  the  subject  from  the  other  side  and  see 
how  the  least  of  the  evils  may  be  chosen.  Without 
recommending  the  practice,  or  qualifying  the  views 
expressed  above,  I  will  therefore  give  my  idea  of  the 
safest  methods  of  scalping. 

"The  man  who  attempts  to  operate  on  both  sides 
of  the  market  during  the  same  period,  is  the  most 
deluded  individual  in  the  speculative  world.  I  have 
already  stated,  that  I  have  only  seen  two  traders 
out  of  thousands  I  have  observed,  who  could  do 
this  with  any  degree  of  success.  These  hybrid  Bull- 
bears  are  certainly  not  working  on  any  definitely 
formed  opinion  of  the  future.  They  are  worse  off 
than  even  the  traders  who  are  unchangeably  and 
constitutionally  wedded  to  one  side  of  the  market 
the  year  round.  These  latter  prejudiced  and  inflexi- 
ble individuals  will  occasionally  have  a  turn  in  their 
direction,  whatever  their  position  may  be,  but  the 
Bull-bear  will  go  from  one  month  to  another,  never 
seeing  anything  more  than  a  temporary  gain. 

"It  is  important,  therefore,  that  the  active  trader 
should  form  his  ideas,  base  his  views  on  something, 
and,  if  he  wishes  to  entertain  himself  with  repeated 
operations,  map  out  a  plan  of  campaign  which  shall 
be,  at  least,  intelligent  in  its  original  conception. 

"Just  how  successfully  the  plan  suggested  will  re- 
sult, depends  largely  upon  the  alertness  and  under- 
standing of  the  individual  who  engineers  it.  If  the 
active  participant  is  easily  moved  from  his  position 
by  changes  of  a  point  or  two  against  him;  if  he  is 


SCALPING  123 

easily  frightened  by  wild  rumors  and  inspired  talk; 
if  he  expects  to  gain  thousands  in  a  few  days  by  ven- 
turing hundreds;  or  if  he  believes  that  he  can  operate 
in  stocks  so  shrewdly  as  to  guess  high  or  low  points 
within  a  dollar  or  two  a  share,  he  will  meet  with  dis- 
appointment and  loss.  If  he  can  overcome  these 
drawbacks,  he  may  do  very  well  as  an  active 
trader,  but  I  wish  to  reiterate  my  views  that  the 
man  who  takes  a  position  on  the  market  and  retains 
it,  will  make  more  money  than  the  scalper. 

"As  a  test  question,  let  me  put  this  inquiry  to  the 
active  traders  who  read  this  letter: 

"When  you  have  been  correct  on  a  certain  move- 
ment of  say  ten  points,  and  have  made  repeated 
operations,  did  you  make  any  more  money,  or  as 
much,  as  you  would  have  realized  on  a  single  trade 
showing  a  ten  point  profit?" — From  Thomas  Gib- 
son's Market  Letter,  February  14th,  1907. 

Crop  Damage. 

As  to  the  crops,  we  find  many  over-optimistic 
people  trying  to  belittle  positive  crop  damage.  It 
cannot  be  belittled.  It  is  dangerous  and  foolish  to 
evade  an  issue  instead  of  facing  it.  The  argument 
that  our  surplus  from  last  year  will  carry  us  through 
a  shortage  is  puerile.  That  surplus  has  already  been 
considered.  Wheat  in  the  bin  is  money;  some  of 
that  money  has  already  been  spent  and  all  of  it  has 
been  given  due  consideration  in  the  basing  of  our 
wealth.  A  number  of  writers  attempt  to  make  a 
probable  crop  of  2,500,000,000  bushels  of  corn  a 
"bumper  crop."  Their  methods  of  arriving  at  this 
conclusion  are  not  sound.  It  is  certain  that  we 
should,  in  the  natural  course  of  events,  raise  more 
and  more  wheat  and  corn  each  year  as  the  popula- 


124       THE  CYCLES  OF  SPECULATION 

tion  of  the  world,  and  the  uses  of  the  cereals  in- 
crease. To  compare  one  year  with  another  will  not 
do.  Particularly  in  Corn  and  Cotton  must  we  stead- 
ily increase  in  acreage  and  production,  for  we  supply 
the  world  with  those  commodities.  To  illustrate  this 
point,  let  us  go  back  a  few  years  and  see  what  has 
occurred. 

COTTON  AND  CORN  PRODUCTION  OF  THE  UNITED 
STATES  FOR  TWENTY-FIVE  YEARS. 

Bushels  Bales 

Year  Corn  Cotton 

'ffo 1,717,434,543         5,789,329 

^°^S 1,936,176,000         6,550,215 

1890 1,568,874,000         8,655,000 

1895 2,151,139,000         7,157,340 

1900 2,105,102,516       10,383,422 

1905 2,707,993,542       11,345,988 

1906 2,927,416,091       13,000,000 

The  time  is  very  near  at  hand,  when  anything 
less  than  3,000,000,000  bushels  of  corn  will  be  a  crop 
failure;  and  high  prices  cannot  be  considered  a  great 
compensation  in  lean  years.  Short  crops  mean  de- 
creased demand  for  labor  and  loss  of  purchasing 
power  by  the  common  people,  who  are  after  all  the 
best  spenders.— From  Thomas  Gibson's  Market  Let- 
ter, July  13th,  1907. 


The  Selection  of  Securities. 

When  so  many  seductive  baits  are  offered,  so 
many  nets  and  traps  contrived  and  constructed  by 
clever  brains  and  cunning  fingers  are  spread  for  the 
capture  of  those  having  money,  is  it  surprising  that 
the  careless  and  credulous  are  victimized,  and  even 
that  the  sagacious  and  prudent  should  sometimes 
be  taken  in?  Nevertheless,  for  the  losses  they  have 
sustained,    investors,    as    a    rule,    have    themselves 


THE  SELECTION  OF  SECURITIES       125 

chiefly  to  blame.  The  mistakes  made,  in  nine  cases 
out  of  ten,  have  been  the  purchase  of  "cheap"  securi- 
ties. The  hope  of  reaUzing  a  little  more  than  ordi- 
nary interest,  by  buying  paper  at  a  discount,  has 
proved  to  be  the  rock  on  which  unnumbered  capi- 
talists have  split.  In  addition  to  their  money's 
worth,  they  have  endeavored  to  get  something  for 
nothing,  with  the  result  of  most  generally  getting 
nothing  for  something.  It  is  remarkable  how  blind 
are  people,  ordinarily  sagacious  enough  to  make 
money,  to  the  fact  that  property  cannot  pay  a  reve- 
nue beyond  its  producing  capacity.  For  instance, 
how  can  a  trolley  company,  whose  line  is  wholly  or 
mainly  built  from  the  proceeds  of  mortgage  bonds, 
sell  them  at  a  heavy  discount,  besides  allowing  large 
commissions  for  the  selling,  and  then  pay  both  this 
interest  and  dividends  on  a  large  issue  of  watered 
stocks?  Or  how  can  a  poor  agriculturist,  occupy- 
ing a  half  improved  farm  out  on  the  frontier,  with 
a  family  to  support  and  grain  selling  barely  above 
the  cost  of  production,  pay  ten  or  twelve  per  cent, 
upon  the  capital  with  which  he  does  business? — 
From  "The  Art  of  Wall  Street  Investing,"  by  John 

Moody- 

The   Bank   Statement. 

"A  statement  or  exhibit  of  the  condition  of 
banks. 

"In  New  York  the  Bank  Statement  is  issued 
from  the  clearing  house  on  Saturday.  The  consoH- 
dated  statement  (or  as  it  is  officially  designated,  the 
"summary  of  the  weekly  statement  of  the  associated 
banks")  is  the  collective  showing  by  the  banks  be- 
longing to  the  clearing  house — the  showing  when 
the  returns  of  the  individual  banks  have  been  con- 
soHdated   (put  together). 


126        THE  CYCLES  OF  SPECULATION 

"The  consolidated  bank  statement  shows  the  aver- 
age deposits,  loans,  specie,  legal  tenders,  circulation, 
reserve  and  surplus  reserve  of  the  banks  for  the 
week  ending  with  and  including  Friday. 

"The  term  deposits  includes  the  net  deposits 
(credit  balances)  of  persons  and  concerns  (desig- 
nated as  individual  deposits),  balances  to  the  credit 
of  other  banks  and  all  money  and  credits  subject  to 
withdrawal.  Loans  include  money  loaned  and  like- 
wise paper  (promissory  notes,  drafts,  etc.)  bought. 
Specie  includes  not  only  gold  and  silver  coins,  but 
also  gold  certificates,  which  are  redeemable  in  gold 
or  silver,  as  the  case  may  be.  Legal  tenders  as  the 
term  is  used  in  the  bank  statement,  means.  United 
States  notes  (greenbacks)  and  Treasury  notes  (notes 
issued  for  silver  bullion  purchased  under  the  so- 
called  Sherman  act). 

"Note. — As  defined  by  the  statutes,  legal  tenders 
include  United  States  notes.  Treasury  notes,  gold 
and  silver  coins  and  minor  coins,  but  not  gold  certifi- 
cates, nor  silver  certificates. 

"Circulation  means  the  notes  issued  by  national 
banks,  to  secure  the  redemption  of  which  Govern- 
ment bonds  have  to  be  purchased  by  the  banks  and 
deposited  with  the  Treasurer  of  the  United  States. 
A  bank  cannot  count  circulation  in  its  reserve; 
whether  it  is  its  own  circulation  or  the  circulation 
of  some  other  bank,  makes  no  difference.  Reserve 
means  the  total  amount  of  specie  and  legal  tenders 
held.  Surplus  reserve  means  the  total  amount  held 
in  excess  of  legal  requirement.  A  national  bank 
(in  New  York  City)  must,  by  law,  maintain  a  re- 
serve equal  to  25  per  cent,  of  its  deposits;  a  state 
bank  must,  by  law,  maintain  a  reserve  of  15  per  cent. 
In  compiling  the  bank  statement  a  reserve  of  25  per 


THE  BANK  STATEMENT  127 

cent,  is  allowed  or  figured  for  state  banks  as  well 
as  for  national  banks. 

"The  consolidated  statement  formerly  was  issued 
from  the  clearing  house  in  the  following  form,  the 
changes  (increases  and  decreases)  resulting  from 
comparison  with  the  preceding  statement  (the  state- 
ment issued  the  week  before) : 

Loans $874,647,900  $2,344,000  Increase 

Specie 152,338,200  1,068,300  Increase 

Legal  Tenders ...  .        67,274,300  1,319,000  Decrease 

Deposits 872,340,600  164,600  Increase 

Circulation 36,072,500  411,600  Increase 

Decrease  of  reserve,  $291,850 

"The  (hnal)  item  reserve  in  the  statement  as 
issued  from  the  clearing  house,  meant  surplus  re- 
serve, although  not  specifically  so  stated. 

"In  the  newspapers  the  statement  appeared  as 
follows;  being  elucidated  so  as  to  show  the  reserve 
held  (that  is,  specie  and  legal  tenders  which  are 
generally  referred  to  as  cash  holdings),  the  reserve 
required  and  the  surplus  reserve  with  the  changes  in 
these  items: 

Current  Preceding 

Week  Week  Changes 

Loans $874,647,900  $872,303,700  In.  $2,344,200 

Deposits.  .  .  .     872,340,600  872,176,000  In.  164,600 

Circulation..       36,072,500  35,660,900  In.  411,400 

Legal  Tends.       67,274,300  68,593,300  De.   1,319,000 

Specie 152,338,200  151,269,900  In.  1,068,300 

Reserve  held  $219,612,500  $219,863,200  De.     $250,700 
Res.  req'r'd.     218,085,150     218,044,000  In.         41,150 

Surplus..       $1,527,350      $i..8l9.200  De.    $20i,8.';o 

"In  1902  the  Secretary  of  the  Treasury  (Leslie  M. 

Shaw)  suspended  the  requirement  to  keep  a  reserve 

against    government    funds   on    deposit    in    national 

banks  upon  the  ground  that  these  funds  were  special 


128        THE  CYCLES  OF  SPECULATION 

deposits  which  were  fully  secured  by  pledge  of 
bonds  with  the  Treasurer  of  the  United  States. 
This  action  by  the  Secretary  of  the  Treasury  caused 
a  change  in  the  make-up  of  the  bank  statement  by 
the  addition  to  it  of  figures  showing  the  average 
amount  of  government  funds  on  deposit.  The  con- 
solidated statement  was  thereafter  issued  from  the 
clearing  house  in  the  following  form: 

Loans $874,647,900       $2,344,200  Increas^ 

Specie 152,338,200         1,068,300  Increase 

Legal  Tenders.  .  .  .  67,274,300         1,319,000  D'crease 

*Deposits 872,340,600             164,600  Increase 

Circulation 36,072,500            411,600  Increase 

Reserve  on  all  de- 
posits   291,850  D'crease 

Reserve  on  all  de- 
posits other  than 

United  States. . .  325,825  D'crease 

*Umted  States  deposits  included,  $40,633,400. 

"In  the  newspapers  the  statement  was  made  up  in 
both  the  old  and  the  new  forms  as  follows: 


Current         Preceding 
Week  Week  Changes 

Loans $874,674,900  $872,303,700  In.  $2,344,200 

Deposits.  .  .  .  872,340,600  872,176,000  In.  164,600 
Circulation..  36,072,500  35,660,900  In.  411,400 
Legal  Tends.  67,274,300  68,593,300  De.  1,319,000 
Specie 152,338,200     151,269,900  In.    1,068,300 

Reserve  held  $219,612,500  $219,863,200  De.  $250,700 
Res.  req'r'd.     218,085,150     218,044,000  In.         4i)iS0 

SxuT)lus $1,527,350       $1,819,200  De.    $291,850 

Deducting  the  United  States  deposits  held  by 
the  banks  from  the  aggregate  deposits  the  bank 
statement  compares  as  follows: 


THE  BANK  STATEMENT  129 

Current  Preceding 

Week  Week               Changes 

Tot.  deposits  $872,340,600  $872,176,000  In.     $164,600 

U.S.  deposits       40,633,400  40,769,300  De.       135,900 

Dep's25%..  $831,707,200  $831,406,700  In.  $300,500 
Reserve  held  219,612,500  219,863,200  De.  250,700 
Res.  req'r'd.      207,926,800     207,851,675  In.  75,125 

Surplus $11,685,700  $12,011,525  De.      $325,825 

"The  detailed  bank  statement,  which  is  issued 
simultaneously  with  the  consolidated  statement,  con- 
tains first  the  number  of  each  bank  (each  bank  has 
a  number  by  which  it  is  known  at  the  clearing 
house)  and  then  the  name  of  the  bank,  after  which 
follow  the  amounts  of  its  capital,  net  profits  (surplus 
and  undivided  profits),  specie,  legal  tenders,  deposits 
and  circulation. 

"The  bank  statement  is  said  to  have  been  made  up 
on  rising  averages  when  the  items  in  it  have  been 
increasing  in  amount  during  the  week,  or  the  state- 
ment is  said  to  have  been  made  up  on  falling  aver- 
ages when  the  items  in  it  have  been  decreasing  in 
amount  during  the  week. 

"Generally  speaking,  the  bank  statement  is  favor- 
able or  good  when  it  shows  that  the  position  of  the 
banks  has  been  strengthened,  as  by  an  increase  in 
the  surplus  reserve  through,  or  by  means  of  an  in- 
crease in  their  cash  holdings  rather  than  by  a  de- 
crease in  their  deposits,  which  often  is  effected  by 
the  calling  of  loans — by  demanding  and  obtaining 
the  payment  of  money  loaned  on  call.  As  money 
loaned  is  credited  to  borrowers  on  their  deposit 
accounts  and  increases  the  total  deposits  of  the 
bank,  so  the  payment  of  loans  by  borrowers  takes 
from  and  decreases  deposits.  As  will  be  seen,  the 
calling  and   consequent  payment  of  loans  does  not 


130        THE  CYCLES  OF  SPECULATION 

increase  cash  holdings  but  merely  changes  balances 
in  individual  accounts.  A  reduction  in  deposits  re- 
duces the  amount  of  cash  required  to  be  held  as  a 
legal  reserve  and  correspondingly  expands  (in- 
creases) the  surplus  reserve.  Generally  speaking, 
also,  the  bank  statement  is  unfavorable  or,  if  par- 
ticularly unfavorable,  is  bad  w^hen  the  position  of 
the  banks  has  been  weakened,  as  by  a  decrease  in 
the  surplus  reserve  through  a  decrease  in  their  cash 
holdings  rather  than  by  an  increase  in  their  depos- 
its, which  often  is  effected  by  an  expansion  in  (in- 
crease in  amount  of)  their  loans,  which  correspond- 
ingly expands  (increases)  their  deposits  and  corres- 
pondingly increases  the  amount  of  cash  required  to 
be  held  as  a  legal  reserve.  This  additional  amount 
is  deducted  from  and  correspondingly  reduces  the 
surplus  reserve. 

"The  bank  statement  may  be  said  to  be  favorable 
or  good,  however,  if  an  increase  in  loans  is  reported 
when  the  banks  are  surfeited  with  money:  also  the 
bank  statement  may  be  said  to  be  unfavorable  or 
rather  not  good  (but  hardly  bad)  when  it  shows 
that  money  is  accumulating  in  idleness  in  the  banks 
— when  deposits  are  increasing,  not  as  a  result  of 
increasing  loans,  but  in  the  absence  of  a  borrowing 
demand  for  money. 

"There  are  other  circumstances  which  make  the 
bank  statement  favorable  or  unfavorable  as  disclosed 
in  the  circumstances  themselves. 

"There  is  also  a  non-member  bank  statement, 
which  is  a  statement  of  the  conditions  of  banks 
which  are  not  members  of  the  clearing  house  but 
clear  through  members.  This  statement  is  issued 
from  the  clearing  house  on  Monday  and  shows  the 
average  condition  of  the  banks  for  the  week  ending 
with  and  including  the  preceding  Friday. 


THE  BANK  STATEMENT  131 

"The  non-member  bank  statement  contains  the 
name  of  each  bank,  followed  by  its  capital,  net 
profits,  average  amount  of  loans  and  discounts  and 
investments,  average  amount  of  specie,  average 
amount  of  legal  tender  notes  and  (national)  bank 
notes,  average  amount  on  deposit  with  its  clearing 
house  agent  (the  bank  through  which  it  clears  at  the 
clearing  house),  average  amount  on  deposit  with 
other  New  York  City  banks  and  trust  companies, 
average  amount  of  net  deposits  and  average  amount 
of  circulation." — From  Smith's  Financial  Dictionary. 


The  Cycles  of  Stock  Speculation.* 

All  speculators,  and  most  investors,  possess 
a  general  idea  of  the  range  and  trend  of  prices 
for  a  considerable  period.  This  knowledge  is 
more  frequently  based  upon  impressions 
gained  during  their  own  years  of  activity  in 
the  speculative  world  than  upon  research. 
The  knowledge  gained  by  active  participation 
is  certainly  the  most  forcible  and  lasting,  but  is 
frequently  productive  of  erroneous  ideas,  as 
will  be  set  forth  hereafter. 

For  the  purpose  of  giving  a  clear  idea  of  the 
movements  in  stocks  during  recent  years,  the 
accompanying  chart  has  been  arranged.  The 
use  of  circles  in  lieu  of  the  customary  straight 
lines  was  hit  upon  as  presenting  more  clearly 
to  the  eye  the  comparative  extent  of  each  year's 
movement,  and  more  plainly  distinguishing 
one  year  from  another.  These  advantages  are 
gained  without  obscuring  from  view  the  gen- 
eral trend  of  prices  for  the  period  considered. 

For  the  purpose  of  establishing  a  single 
hypothetical  stock  whose  movements  should 
be  representative  of  the  course  of  all  other  ac- 


•Reprinted  from  Moody's  Magazine  of  Augrust  1906. 
133 


134        THE  CYCLES  OF  SPECULATION 

tive  securities,  the  fluctuations  of  twenty 
stocks  were  welded  together.  That  is  to  say, 
the  high  points  of  these  stocks  for  the  year 
1896  were  added  and  divided  by  20.  The  same 
course  was  followed  with  the  low  points,  and 
each  year  considered  was  treated  in  like  man- 
ner. By  drawing  a  circle  upon  a  numbered 
chart  with  the  upper  rim  resting  upon  the 
figures  representing  the  high  point,  and  the 
lower  rim  upon  those  representing  the  low 
point,  an  average  price  for  the  year  is  neces- 
sarily estabhshed  at  the  axis. 

The  size  of  the  circles  shows  the  actual  and 
comparative  extent  of  the  movements,  and  the 
position  of  consecutive  years  on  the  diagram 
shows  the  general  trend  of  prices. 

In  selecting  the  twenty  stocks  to  be  used  in 
forming  a  composite  security,  care  was  taken 
to  eliminate  the  shares  of  such  corporations  as 
have  undergone  radical  changes  during  the 
period  considered,  1896  to  1905,  inclusive.  The 
Rock  Island  Company,  for  example,  is  in  itself 
an  important  system,  but  owing  to  the  con- 
version of  $75,000,000  Common  stock  into 
$200,000,000  of  mixed  securities  in  1902,  the 
tracing  of  its  subsequent  movements  would  in- 
volve unnecessary  computations  and  expla- 
nations. It  may  be  added  that  experimental 
tests  show  that  the  hypothetical  stock,  call  it 


RANGE  OF  "COMPOSITE  COMMON"     135 

"Composite  Common"  for  the  sake  of  conveni- 
ent reference,  was  faithfully  representative  of 
almost  all  movements  from  1896  to  1906,  and 
that  the  selection  of  other  stocks  would  have 
made  only  insignificant  variations  in  the  gen- 
eral result.  The  original  intention  was  to  ex- 
tend the  investigation  for  a  longer  period  than 
ten  years,  but  so  many  readjustments,  assess- 
ments, and  other  changes  occurred  in  listed  se- 
curities prior  to  1896  as  to  make  a  clear  show- 
ing difficult. 

Common  stocks  of  railroads  only  were  con- 
sidered. Few  Industrials  have  reached  their 
tenth  birthday,  and  aside  from  this,  their  in- 
troduction would  make  a  false  showing  by  in- 
creasing the  dividend  rate  with  no  correspond- 
ing increase  in  the  selling  price  of  the  stock. 

The  twenty  stocks  chosen  for  amalgamation 
were  as  follows: 

Atchison,  Topeka  &  Santa  Fe,  Baltimore  and 
Ohio,  Canadian  Pacific,  Canada  Southern, 
Chesapeake  &  Ohio,  Chicago  &  Great  Western, 
Chicago,  Milwaukee  &  St.  Paul,  Chicago  & 
Northwestern,  Chicago,  St.  Paul,  Minneapolis 
&  Omaha,  Erie,  Illinois  Central,  Louisville  & 
Nashville,  Missouri  Pacific,  New  York  Central 
&  Hudson  River  RR.,  Pennsylvania,  Reading, 
Southern  Pacific,  Southern  Railway,  Union 
Pacific,  and  Wabash  RR. 


136        THE  CYCLES  OF  SPECULATION 

PRICES  OF  COMPOSITE  BY  YEARS  FROM  1896  TO 
1906,  INCLUSIVE. 

Fluctua- 
Year  High     Average     Low  tion 

1896 44  37i  31  13 

1897 53i  43s  34i  18  J 

1898 62^  53i  44  i8i 

1899 72i  64i  56  16  J 

1900 80^  70^  6o|  2o|^ 

1901 io6i  89I  73i  33J 

1902 ii9i  105^  9if  27f 

1903 106^  89I  73i  33  J 

1904 105I  91  76^  29 

1905 I22|     I09f     96^      26i 

1906 125I    iii|    98^     27f 

Fractions  were  necessarily  omitted  from  the 
totals  employed  in  charting  the  movements. 
They  are,  however,  unimportant.  Dividends 
on  Composite  Common  were  as  follows: 

1896 If  % 

1897 li  % 

1898 If  % 

1899 ir*o% 

1900 2^  % 

1901 3     % 

1902 3h   % 

1903 3l   % 

1904 3A% 

1905 3l   % 

1906 4|   % 

It  has  been  the  frequent  contention  of  the 
writer  that  a  chart  as  a  basis  for  speculative 
ventures  is  ridiculous,  but  a  diagram  framed 
for  the  purpose  of  pointing  out  certain  facts,  or 
inciting  the  student  of  speculative  affairs  to 
investigation  of  causes  is  a  different  matter. 
No  interested  person  can  look  at  the  accom- 


RANGE  OF  "COMPOSITE  COMMON"    137 

FLUCTUATIONS  OF  STOCKS  FOR  TEN  YEARS. 
(The  rims  of  the  circles  touch  the  average  high  and  low  points 
of  20  railroad  stocks,  each  year  for  10  years.) 


Reproduced,  by  permission,  from  Moody's  Magazini;  of  August 
1906. 


138       THE  CYCLES  OF  SPECULATION 

panying  chart  without  being  struck  at  once 
with  the  decline  of  1903  following  the  steady 
advance  of  the  preceding  years.  If  this  ob- 
servation incites  intelligent  investigations  as  to 
the  reasons  for  the  reversal,  much  good  may 
result.  On  the  other  hand,  the  fallacy  of  oper- 
ating on  mere  mechanical  records  of  the  past 
is  shown  by  the  same  diagram.  If  the  chart 
had  been  handed  to  one  of  the  mechanical 
traders  in  1902  he  would  have  argued  that  the 
average  price  of  each  year  marked  the  approxi- 
mate low  point  of  each  succeeding  year.  It 
certainly  does  look  convincing,  but  what  fol- 
lows? The  infallible  system  not  only  fails  to 
work,  but  reverses  itself,  and  the  average  price 
of  1902  becomes  the  approximate  high  price  of 
1903  and  1904.  At  about  the  time  the  system 
player  has  gathered  enough  figures  to  go  on,  a 
change  occurs.  No  intrinsic  merit  attaches  to 
any  kind  of  diagram,  they  being  merely  con- 
venient forms  for  tabulating  history. 

Some  interesting  coincidences  occur  in  the 
chart;  most  remarkable  is  the  exactly  similar 
size  and  position  of  the  circles  representing  the 
years  1901  and  1903.  In  no  instance  did  the 
high  or  low  points  of  any  integral  stock  cor- 
respond in  these  years,  but  the  total  footings 
were  identical  in  each  case. 

The  speculator  may  extract  some  value  from 
the  diagram  by  observing  that  opportunities 


RANGE  OF  "COMPOSITE  COMMON"     139 

for  profits  of  forty  or  fifty  points  did  not  occur 
during  the  entire  period.  The  extreme  possi- 
bilities in  any  one  year  were  33  points,  and 
much  less  on  the  average.  If  the  trader  had 
purchased  or  sold  Composite  at  an  average 
price,  his  possibilities  of  profit  would  have  been 
limited  to  about  15  points  in  any  one  year. 
This  does  not  accord  with  accepted  theories. 
The  ordinary  speculator  who  pursues  his 
operations  for  ten  or  fifteen  points  successfully 
is  almost  certain  to  believe  that  much  more 
profit  lies  before  him,  that  he  is  only  getting 
started.  There  is  a  reason  for  this;  the  public 
trader  takes  for  his  barometer  some  security 
which  has  been  conspicuous  for  its  extended 
fluctuations;  he  naturally  notices  and  remem- 
bers it  to  the  exclusion  of  the  rank  and  file  of 
stocks.  For  example,  every  active  participant 
in  speculative  affairs  knows  that  Copper  had  a 
range  of  75  points  in  a  single  year,  1901.  He 
bases  possibilities  too  much  on  this  sort  of 
knowledge  without  reflecting  that  Copper  was 
a  cardinal  exception,  and  that  in  order  to  par- 
ticipate in  such  movements  he  must  throw 
caution  to  the  winds,  and  deal  in  stocks  which 
offer  no  degree  of  safety. 

Another  point  established  is  the  lapse  of 
time  required  in  a  readjustment  of  values.  It 
took  Composite  Common  seven  years  to  ad- 
vance from  an  average  price  of  37  to  an  aver- 


140        THE  CYCLES  OF  SPECULATION 

age  price  of  105,  68  points.  This  again  falls 
short  of  the  speculator's  ideas.  He  expects  to 
buy  a  stock  at  50  today,  and  sell  it  at  par  six 
months  hence,  an  operation  which  is  shown 
by  the  movements  of  a  representative  stock 
to  require  a  period  of  six  years.  Again  his  ex- 
pectations are  founded  on  exceptions.  The 
same  line  of  reasoning  applies  to  one  case  as 
to  the  other.  The  speculator  unconsciously 
magnifies  everything  connected  with  specu- 
lation. 

In  reviewing  the  movements  of  prices  from 
1896  to  1905,  the  most  important  question  is, 
what  caused  the  reversal  of  form  in  1903?  A 
complete  answer  to  this  question  would  be 
highly  educational.  There  was  no  panic, 
nothing  faintly  resembling  one;  business  suf- 
fered some  stagnation,  it  is  true;  there  was  a 
falling  off  in  the  iron  and  steel  business,  but 
crops  were  good,  and  wheat,  corn,  oats,  and 
cotton  brought  good  prices  in  both  1903  and 
1904.  Serious  business  depression  was  more 
in  anticipation  than  in  realization,  but  1904 
witnessed  no  material  recovery  in  prices. 
These  causes  do  not  fully  explain  so  radical  a 
change.  If  conditions  had  been  such  as  to 
cause  a  reduction  of  dividends,  or  a  scarcity  of 
money  in  1903,  the  decline  would  be  explained, 
but  money  was  plentiful  enough,  and  dividends 
were  unchanged.     The  ratio  of  dividends  as 


RANGE  OF  "COMPOSITE  COMMON"    141 

compared  with  prices  was  also  fairly  main- 
tained from  1896  to  1902,  and  it  would  appear 
that  prices  should  merely  stop  advancing  when 
dividends  became  stationary ;  but  prices  did  not 
merely  stand  still,  they  went  materially  back- 
ward. 

Without  pretending  to  enter  into  a  full  dis- 
cussion of  the  causes  for  the  change,  one  or 
two  points  may  assist  in  forming  a  conclusion. 
The  steady  advance  in  prices  from  1896  to 
1902  represented  two  things — a  recovery  from 
the  great  depression  of  1893,  and  the  natural 
advances  of  property  values  in  a  prosperous 
and  growing  country.  The  latter  point  is  the 
more  important,  and  as  there  has  been  no  ces- 
sation of  the  growth  of  population  or  pros- 
perity, other  causes  for  the  reversion  must  be 
sought.  It  is  not  sufficient  to  merely  say  that 
the  recovery  over-leaped  itself,  for  such  an 
event  would  have  plainly  mirrored  itself  in  a 
reduction  in  the  rate  of  dividend  returns. 

Capitalization  of  railroads  in  1903  increased 
about  14%  as  compared  with  an  average  in- 
crease of  6%  in  the  preceding  seven  years. 
Add  to  this  the  tremendous  increase  in  the 
capitalization  of  industrial  corporations,  and 
an  over-supply  of  stocks  appears  as  one  of  the 
contributary    causes — undigested    securities. 

Dividend  rates  were  maintained,  but  were 
not  increased.     This   particularly   affects   the 


142        THE  CYCLES  OF  SPECULATION 

simon  pure  speculator.  Nothing  will  drive 
him  into  a  panic  quicker  than  a  decreased  divi- 
dend, and  nothing  makes  him  so  sanguine  of 
higher  prices  as  an  increase  in  the  rate  of  pay- 
ment. He  is  always  basing  his  operations  on 
rumors  of  higher  dividends,  and  when  one  of 
these  rumors  fails  of  verification,  it  is  almost 
as  bad  as  a  decrease. 

And  dividends  did  decrease  in  one  important 
quarter;  United  States  Steel,  the  speculative 
favorite,  capitalized  more  heavily  than  a  dozen 
ordinary  corporations,  cut  its  rate  from  4  to 
3^%,  with  every  promise  of  a  further  re- 
duction. This  had  a  far  reaching  effect,  both 
on  speculators  and  small  investors. 

It  is  certain  that  fundamental  conditions 
have  more  to  do  in  shaping  prices  than  has 
speculation,  but  the  speculator  helps,  and  in 
1903  he  was  particularly  potent  because  of  the 
excesses  engendered  by  the  unusual  specula- 
tive advances  of  1901  and  1902.  He  helped  to 
make  the  prices  and  he  helped  to  break  them, 
so  he  may  be  considered  a  factor  in  the  re- 
versal. 

The  small  investor  helped.  He,  too,  is  a 
dividend  man ;  he  seldom  looks  at  earnings,  im- 
provements, or  extensions — he  wants  divi- 
dends. United  States  Steel  was  a  body  blow 
to  him;  it  not  only  affected  his  purse,  but  it 
frightened  him. 


RANGE  OF  "COMPOSITE  COMMON"     143 

And  it  is  probable  that  an  army  of  small  in- 
vestors sold  their  holdings  for  another  reason 
— they  discovered  that  they  could  make  a 
higher  rate  of  income  in  other  channels.  So 
long  as  both  dividends  and  prices  advanced 
they  were  satisfied.  They  were  speculating, 
not  investing,  but  you  cannot  convince  the 
ordinary  man  that  buying  a  stock  outright,  in 
the  hope  of  an  advance  in  price,  is  speculation 
pure  and  simple. 

Much  of  the  money  diverted  from  the  stock 
market  in  1903  by  the  class  last  mentioned,  has 
never  returned  to  Wall  Street.  This  bears 
out  the  theory  that  higher  rates  of  interest  are 
being  found  elsewhere.  Never  before  has  the 
public  refused  to  enter  the  stock  market  dur- 
ing a  period  of  great  prosperity.  They  are 
absent  now,  and  furthermore,  they  show  no  in- 
tention of  returning.  Possibly  they  are  wrong. 
The  same  influences  which  are  operating  to 
give  them  better  returns  may  be  operating  to 
greatly  enhance  the  value  of  the  shares  they 
ignore, — but  the  small  investors  want  divi- 
dends. Their  failure  to  enter  the  stock  market 
would  seem  to  be  strong  evidence  that  they 
are  finding  other  investment-speculations  more 
attractive  than  listed  shares.  If  this  is  the 
case,  the  influences  leading  to  higher  interest 
rates  are  already  at  work,  although  not  clearly 


144        THE  CYCLES  OF  SPECULATION 

discernible.       Diversification     of     investments 
would  tend  to  obscure  the  truth  for  a  time. 

But  whatever  the  causes  for  the  stock 
market  relapse  of  1903  may  have  been,  the  re- 
covery has  been  complete.  The  average  prices 
of  1906  were  the  highest  on  record. 


Cycles  of  Grain  Speculation.* 

In  examining  the  price  movements  of  wheat 
and  corn  for  the  last  ten  years,  a  gradually  ad- 
vancing trend  is  apparent.  That  such  would 
be  the  case  was  a  foregone  conclusion;  we 
naturally  expect  to  find  wheat  and  corn  in  the 
foremost  ranks  of  a  universal  movement  to- 
wards higher  prices.  The  underlying  causes 
for  this  general  appreciation  have  already  been 
extensively  and  clearly  discussed  in  Moody's 
Magazine. 

All  Prices  Advancing. 

The  price  appreciation  of  wheat  and  corn  is 
merely  confirmatory  of  the  theory  that  all 
prices  are  advancing,  and  that  they  will  con- 
tinue to  advance  until  the  balance  between 
gold  and  other  commodities  is  readjusted. 

But  there  is  something  else  written  between 
the  lines  of  the  statistics  of  price  changes  in 
wheat  and  corn.  The  relative  advance  of  the 
two  cereals  is  all  out  of  proportion. 

This  fact  leads  us  to  seek  for  some  specific 
cause  operating  either  to  depress  one  cereal  or 

•Reprinted  from  Moody's  Magazins  of  May,  1906. 
145 


146        THE  CYCLES  OF  SPECULATION 

enhance  the  other,  irrespective  of  the  influence 
already  named. 

The  figures  for  the  last  ten  years  are  as  fol- 
lows: 

WHEAT. 

Year  High  Average  Low 

1896 94t         73iH  53 

1897 ^09     86f^,;  64^ 

1898 185  123I  62 

1899 79^    71 1  64 

1900 87i    74i  61^ 

1901 79I  71 1^^  63! 

1902 95  8ii  67^ 

1903 93  81  f  70  J 

1904 122  101}  I?  81 J 

1905 124  loofS  77i 

1906 94l  8i|  69^ 

CORN. 

Year  High  Average  Low 

1896 3of  25yV  i9i 

1897 32I  27r\  21  a 

1898 38  32  26 

1899 38i  34tV  30 

1900 49i  40  30J 

1901 67^  51 J  36 

1902 88  65J  43f 

1903 53  47  41 

1904 58i  50rV  42i 

1905 64^  53i  42 

1906 54l  46^  39 

The  average  price  of  wheat  in  the  first  year 
(1896)  was  73  11-16,  in  the  two  following 
years  very  high  prices  were  established,  and 
the  average  may  be  considered  abnormal,  as 
the  years  1897  and  1898  cover  the  rise  and  fall 
of  Joseph  Leiter. 


WHEAT  AND  CORN  PRICES 


147 


FLUCTUATIONS  OF  WHEAT  PRICES  FOR  TEN  YEARS. 

(The  rims  of  the  circles  touch  the  high  and  low  prices  of  wheat 
each  year  for  10  years.) 


Reproduced,  by  pennission,  from  Moody's  Magazine  of  August, 
1906. 


148        THE  CYCLES  OF  SPECULATION 

To  digress  for  a  moment,  it  may  be  interest- 
ing to  note  that  efforts  to  carry  prices  beyond 
reasonable  limits  almost  invariably  result  in 
disaster  to  the  promoters,  no  matter  how  far 
they  may  be  successful  in  establishing  black- 
board quotations.  With  the  exception  of  "Old 
Hutch"  wheat  corner  in  1888,  all  the  numerous 
attempts  to  speculate  successfully  on  wholly 
artificial  prices  in  commodities,  have  failed. 
The  Sully  cotton  campaign,  the  Leiter  wheat 
deal,  the  Phillips  corn  deal,  the  Coster-Martin 
corn  deal,  all  ended  in  ruin  for  their  sponsors. 

From  1899  to  1901  inclusive,  the  average 
price  of  wheat  was  a  little  above  70  cents,  in 
1902  and  1903  it  rose  to  80  cents,  and  in  1904 
and  1905  to  $1.00. 

In  the  latter  years,  allowance  must  again  be 
made  for  unusual  influences,  the  Russo-Japan- 
ese war  naturally  helping  wheat  prices;  mak- 
ing due  allowance  for  this,  it  may  be  fairly  con- 
sidered that  wheat  has  in  the  last  ten  years  in- 
creased its  average  selling  price  from  about  70 
cents  to  90  cents,  or  approximately  Z0%. 

Why  Corn  Has  Risen  More  Than  Wheat. 

Corn  prices  in  the  same  period  have  ad- 
vanced 100% ;  the  comparatively  large  number 
of  uses  to  which  corn  is  put  may  partly  ac- 
count for  the  disproportionate  enhancement  of 


WHEAT  AND  CORN  PRICES  149 


FLUCTUATIONS  OF  CORN  PRICES  FOR  TEN  YEARS. 
(The  rims  of  the  circles  touch  the  high  and  low  prices  of  corn 
each  year  for  10  years.) 


,«?®P'"°"^"'^^'^'  ^y  permission,  from  Moody's  Magazine  of  May, 
1906. 


150       THE  CYCLES  OF  SPECULATION 

its  price,  but  the  discrepancy  is  too  great  to  be 
entirely  explained  away  on  this  account.  It 
is  necessary  to  seek  some  additional  and  more 
powerful  reason. 

The  following  statistical  facts  will  make  it 
clear  that  corn  and  wheat  are  in  wholly  differ- 
ent positions. 

The  United  States  raised,  in  1905,  693,000,- 
000  bushels  of  wheat.  The  world's  wheat  crop 
in  the  same  year  was  3,275,200,000  bushels. 
Therefore,  we  raised  approximately  21%  of 
the  world's  wheat  crop.  The  year  1905  is 
fairly  indicative  of  the  proportions  for  the  last 
ten  years. 

The  acreage  of  wheat  in  the  United  States 
in  1896  was  43,618,646;  in  1905  it  was  47,854,- 
079,  an  increase  of  38 9^  . 

The  world's  wheat  acreage  as  indicated  by 
production,  is  increasing  at  about  the  same 
rate  as  is  the  acreage  of  the  United  States. 

The  United  States  raised,  in  1905,  2,708,- 
000,000  bushels  of  corn.  The  world's  corn 
crop  was  3,396,800,000;  therefore,  we  raised 
80%  of  the  world's  corn. 

The  corn  acreage  of  the  United  States  in 
1896  was  81,027,156;  in  1905  it  was  94,011,369, 
an  increase  of  16%.  The  world's  corn  acreage, 
as  shown  by  production,  did  not  keep  pace 
with  our  own  ratio  of  increase,  but  remained 
almost  stationary. 


CORN  AND  WHEAT  151 

These  figures  show  that  the  world  is  depend- 
ing on  the  United  States  for  only  21%  of  its 
wheat,  and  that  wheat  acreage  the  world  over 
has  increased  about  38'/o  in  ten  years;  but  the 
world  is  depending  on  the  United  States  for 
80%  of  its  corn,  and  the  world's  corn  acreage 
has  increased  less  than  16%. 

In  order  to  grasp  the  full  significance  of 
these  figures,  our  practical  monopoly  of  corn 
production  must  be  appreciated.  Even  if  we 
admit  an  equal  ratio  of  increase  in  corn  acreage 
the  world  over^  it  remains  for  the  United  States 
to  provide  80%  of  the  increase. 

Corn  Area  Limited. 


The  probability  of  any  considerable  area  of 
new  corn  land  being  exploited,  either  at  home 
or  abroad,  is  very  small.  A  recent  circular 
letter  by  a  man  prominent  in  the  cash  corn 
trade,  states  that  there  is  not  an  uncultivated 
acre  of  available  corn  land  in  the  United  States. 
This  is  a  radical  statement,  and  does  not  allow 
for  the  fact  that  with  a  sufficient  price  stimu- 
lus, considerable  wheat,  or  even  cotton  land, 
would  be  diverted  to  corn.  But  whatever  al- 
lowances are  made  for  an  increased  corn  pro- 
duction, it  must  be  admitted  that  the  possibili- 
ties are  largely  confined  to  the  United  States. 

Wheat  acreage  is  not  thus  circumscribed;  in 


152        THE  CYCLES  OF  SPECULATION 

fact,  the  case  is  practically  reversed;  almost 
80%  of  the  natural  increase  in  wheat  produc- 
tion will  come  from  outside  our  boundaries. 
Of  the  principal  wheat  producing  countries, — 
France,  Germany,  Russia,  Poland  and  Cau- 
casus, Italy,  Hungary,  Spain,  Roumania  and 
Argentine  Republic — the  two  first  named  alone 
fail  to  keep  pace  with  the  United  States  in 
ratio  of  increased  production,  and  others  have 
made  up  the  deficit  of  these  two  laggards. 

In  a  nutshell,  the  difference  between  the  rela- 
tive positions  of  wheat  and  corn  is  this:  The 
world's  supply  of  wheat  will  be  furnished  by 
the  world,  while  the  world's  supply  of  corn 
must  be  furnished  by  the  United  States. 

It  appears,  therefore,  that  while  wheat  and 
corn  may  both  be  expected  to  gradually  seek 
a  higher  average  price  in  sympathy  with  the 
general  upward  trend,  corn  is  affected  by  a 
specific  influence,  the  effects  of  which  must  be 
added  to  the  homogeneous  advance. 

It  is  not  possible  that  the  supply  of  corn 
should  increase  as  rapidly  as  the  demand, 
under  the  circumscribed  conditions  herein  set 
forth.  As  has  already  been  suggested,  the 
price  of  corn  may  become  attractive  enough  to 
cause  the  diversion  of  wheat  and  cotton  lands 
to  corn  growing.  The  possibilities  of  such  a 
course,  however,  are  not  only  limited  by  na- 
ture, but  such  action  would   stop   itself  at  a 


CORN  AREA  LIMITED  153 

certain  point  by  decreasing  the  supply  of  wheat 
or  cotton,  and  again  restoring  them  to  favor 
with  the  planter. 

The  speculator  may,  therefore,  reasonably 
believe  that  corn  is  destined,  eventually,  to 
reach  much  higher  prices.  He  must,  of  course, 
allow  for  the  temporary  influences  of  large 
and  small  crops,  and  the  numerous  other  actual 
and  technical  conditions  which  cause  inter- 
mediate fluctuations,  and  must  furthermore 
bear  steadily  in  mind  the  fact  that  there  is  a 
limit  beyond  which  the  price  of  corn  can  never 
be  sustained. 

When  a  given  commodity  goes  beyond  a 
price  where  it  can  be  replaced  by  another  com- 
modity, it  has  gone  too  far;  and  when  necessi- 
ties become  luxuries,  they  take  their  places  as 
such,  and  demand  slackens. 


154        THE  CYCLES  OF  SPECULATION 


FLUCTUATIONS  OF  COTTON  PRICES  FOR  TEN  YEARS. 

(The  rims  of  the  circles  touch  the  average  hi  gh  and  low  price 
of  cotton  each  year  for  10  years.) 


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Reproduced,  by  permission,  from  Moody's  Magazine  of  June, 
1906. 


Cycles  of  Cotton  Speculation.* 

The  accompanying  chart,  formed  on  the 
same  plan  as  the  diagram  illustrating  the 
movements  of  stocks  in  Moody's  Magazine 
for  May,  develops  some  interesting  features  in 
the  movements  of  Cotton  for  the  last  ten  years. 

For  the  benefit  of  those  readers  who  did  not 
follow  the  stock  chart,  it  may  be  said  that  each 
circle  represents  the  fluctuations  for  a  single 
year.  The  bottom  rim  of  the  circle  rests  on  the 
lowest  price  during  the  period,  and  the  top 
rim  on  the  highest  price.  The  average  price 
is,  of  course,  established  at  the  axis. 

The  chart  illustrates  speculative  extremes  in 
cotton,  the  figures  on  which  it  is  based  are  not 
the  prices  of  Spot  cotton,  but  extreme  high  or 
low  prices  for  all  options.  The  result,  how- 
ever, would  have  been  only  slightly  changed 
had  Spot  cotton  prices  been  employed. 

The  diagram  is  based  on  fluctuations  of  25 
points,  or  ^  cent  per  pound ;  the  prices  shown, 
therefore,  are  not  exact,  but  they  serve  to  illus- 
trate comparative  movements  with  sufficient 
accuracy.     The  high  and  low  figures  are  not 


•Reprinted  from  Moody's  Magazine  of  June.  1906. 
155 


156       THE  CYCLES  OF  SPECULATION 

those  of  a  calendar  year,  but  of  a  fiscal,  or  crop 
year,  ending  August  31  of  the  years  named; 
thus  the  prices  for  1896  represent  the  fluctu- 
ations of  the  season  1896-1897.  As  production 
is  necessarily  a  vital  factor  in  making  prices, 
this  method  was  adopted  to  prevent  confusion 
in  examining  the  price  effects  of  lean  or  abund- 
ant production.  The  range  of  prices  for  the 
period  considered  (1896  to  1906  inclusive),  was 
as  follows: 

Fluctu- 

Season  High  Average  Low  ation 

1896-97 8.50  7.59  6.69  1,81 

1897-98 7-50  6.50  5,62  1.88 

1898-99 6.73  5.84  4.96  1.77 

1899-00 10.00  8.38  6.76  3.24 

1900-01 10.60  8.80  7.01  3.59 

1901-02 9.67  8.51  7.35  2.32 

1902-03 13.75  10.81  7.87  5.88 

1903-04 17-46  13-23  9-01  8.45 

1904-05 II. 15  8.77  6.39  4.76 

1905-06 12.54  10.93  9-32  3-22 

1906-07 11.30         9.95        8.60  2.70 

In  the  first  three  years  considered  we  find 
low  prices,  and  naturally  restricted  specula- 
tion. The  speculative  price  range  for  the  en- 
tire three  year  period  is  only  a  shade  more 
than  3^  cents  per  pound.  This  was  occasioned 
by  two  things;  first,  the  general  depression 
following  the  panic  of  1893,  and  second,  over- 
production. An  examination  of  the  prices  of 
staples  shows  that  unusually  low  figures  pre- 
vailed in  1898  and  1899.     Corn,  for  example, 


COTTON  SPECULATION  157 

averaged  27  cents  in  1897,  and  31^  cents  in 
1898.  Wheat  shows  high  average  prices,  but 
the  showing  is  a  result  of  fictitious  speculative 
figures  established  by  the  Leiter  deal,  and  can- 
not be  considered  a  fair  criterion.  It  may  be 
added,  however,  that  wheat  sold  as  low  as  64 
cents  in  1897,  and  62  cents  in  1898. 

The  question  of  over-production  will  be 
made  apparent  by  reference  to  the  following 
table : 

Season  Crops  in  Bales 

1896-97 8.714,000 

1897-98 11,180,000 

1898-99 11,235,000 

1899-00 9,439,000 

1900-01 10,425,000 

1901-02 10,701,000 

1902-03 10,758,000 

1903-04 10,123,000 

1904-05 13,556,000 

1905-06 10,697,000 

1906-07 13,000,000 

Prior  to  1897  no  crop  of  over  10,000,000  bales 
had  ever  been  made;  the  two  bumper  crops, 
1897-98  and  1898-99  coming  together,  naturally 
brought  about  very  low  prices,  particularly  as 
they  occurred  in  a  period  of  general  depression. 

In  the  season  next  following,  1899-1900, 
there  is  a  marked  falling  off  in  production, 
which  is  again  reflected  in  a  higher  average 
price.  But  from  that  time  on,  we  do  not  find 
prices  and  production  in  such  perfect  accord. 

It  is  generally  considered  now  that  10,500,- 


158        THE  CYCLES  OF  SPECULATION 

000  bales  is  a  fair  crop.  In  the  four  seasons 
from  1900-01  to  1903-04  inclusive,  we  raised 
normal  crops,  while  prices  advanced.  It  would 
be  manifestly  unfair  to  consider  the  year  1903- 
04  as  reflecting  with  any  degree  of  accuracy 
the  normal  price  of  cotton,  for  in  that  period 
occurred  the  disastrous  Sully  campaign. 
Making  due  allowance  for  this,  however,  it 
may  be  assumed  that  prices  would  have  ad- 
vanced if  no  such  deal  had  occurred.  This 
statement  is  supported  by  the  fact  that  the 
bursting  of  the  bubble  did  not  put  prices  below 
9  cents  at  any  time. 

Now  the  most  important  part  of  the  period 
is  reached,  the  seasons  of  1904-05  and  1905-06. 

In  1904-05,  in  the  face  of  an  unprecedented 
crop  of  13,600,000  bales,  and  in  spite  of  the  de- 
pressing influence  of  a  speculative  debauch  in 
the  previous  year,  the  average  price  of  cotton 
was  834  cents. 

Still  later,  in  1905-06,  a  crop  only  a  little  be- 
low normal  was  raised  and  sold  at  an  average 
price  of  10.93. 

Eliminating  speculative  extremes,  and  the 
temporary  effects  of  large  or  small  crops,  it 
appears  that  the  price  of  cotton  is  steadily  ad- 
vancing. This  is  the  principal  fact  for  the 
speculator  to  consider. 

No  one  pretends  to  dispute  the  fact  that  the 
prices  of  all  staple-food  stuffs,  metals  and  other 


COTTON  SPECULATION  159 

commodities,  as  well  as  labor,  have  advanced 
materially  in  the  last  ten  years.  Yet  the  ordin- 
ary speculator  ignores  this  broad  general 
principle,  and  seeks  specific  causes  for  the  re- 
adjustment in  cotton  prices.  And  even  this 
research  is  seldom  conducted  intelligently. 
The  investigator  attempts  to  explain  higher 
cotton  prices  by  pointing  to  reduction  of  acre- 
age, diversification  of  crops  and  organizations 
formed  for  the  purpose  of  withholding  supplies 
from  the  market.  He  disregards  the  fact  that 
while  these  influences  play  some  small  part  in 
the  matter,  cotton  is  also  seeking  a  higher  level 
in  common  with  every  commodity  that  is 
bought  and  sold. 

The  contention  is  frequently  heard  that 
10,500,000  bales,  or  even  11,000,000  bales  of 
cotton  can  no  longer  be  considered  an  average 
crop;  that  the  supply  should  steadily  increase 
in  order  to  keep  pace  with  consumptive  de- 
mand, and  that  the  crop  of  1904-05  was  there- 
fore small,  and  the  crop  of  1903-04  not  so  large 
as  it  would  appear.  As  this  is  the  most  com- 
mon of  the  numerous  explanations  offered  as 
to  the  recent  high  prices  of  cotton,  it  will  be 
briefly  discussed. 

In  order  to  arrive  at  a  clear  view  of  the  ratio 
of  increase  in  production,  a  considerable  period 
must  be  consulted.  The  statistics  of  crops 
from  year  to  year,  or  even  from  two  or  three 


160        THE  CYCLES  OF  SPECULATION 

years,  will  not  do.    Let  us  cover  a  long  period, 
jumping  ten  years  at  a  time. 

Season  Crops  in  Bales 

1866-61 3,849,469 

1870-71 4,352,317 

1880-81 6,605,750 

1890-91 8,652,597 

1900-01 10,383,432 

This  exhibit  shows  that  if  a  sufficiently  long 
period  is  consulted,  a  steady  increase  in  pro- 
duction is  shown;  the  average  production  is 
also  well  maintained  in  the  five  years  from 
1901-02  to  1905-06,  if  the  bumper  crop  of  1904- 
05  is  distributed  over  the  entire  period. 

The  contention  is  all  right,  but  its  formu- 
lators  do  not  take  the  pains  to  ascertain  that 
what  they  claim  should  occur,  is  exactly  what 
has  occurred. 

The  gist  of  the  whole  matter  is  this :  regard- 
less of  all  temporary  or  artificial  influences, 
some  powerful  force,  not  related  to  supply  and 
demand,  is  shouldering  prices  steadily  upward. 

To  the  speculator  this  fact  recognized, 
analyzed,  and  properly  applied  should  be  of 
incalculable  benefit.  If  he  understands  why 
prices  have  been  advancing,  he  will  be  able  to 
determine  with  facility  how  long  the  influence 
will  probably  endure.  Intead  of  being  misled, 
or  rendered  over-cautious  by  obsolete  records 
of  the  past,  he  will  be  able  to  calculate  from 
these  obsolete  records  the  reasonable  expec- 


COTTON  SPECULATION  161 

tations  of  the  future.  Temporary  changes  will, 
of  course,  be  brought  about  by  temporary 
causes.  Fundamental  values  will  still  be  in- 
fluenced by  supply  and  demand,  but  if  an  in- 
dependent and  submerged  force  is  also  at  work, 
due  allowance  must  be  made  for  its  operation. 

That  such  a  force  i_s  at  work  is  written  large 
between  the  lines  of  compiled  statistics;  to 
ignore  its  existence  is  an  error  rank  with  mis- 
chief. The  speculator  who  does  not  consult 
this  influence  may  easily  make  the  mistake  of 
selling  at  low  prices  because  they  are  high  by 
comparison  with  prices  which  obtained  a  few 
years  ago. 

On  the  other  hand,  a  clear  understanding  of 
the  matter  will  enable  the  trader  to  decide  with 
more  or  less  accuracy  what  now  constitutes  a 
low  price  for  cotton,  and  what  will  be  the  prob- 
able price  for  the  future. 


Conclusion. 

The  questions  most  frequently  asked  by  in- 
experienced people  are  as  follows: 

1 — What  margins  are  necessary  to  reason- 
able safety? 

2 — Is  it  better  to  study  the  entire  list  or 
make  a  specialty  of  one  stock? 

3 — What  class  of  securities  is  the  safest? 

4 — What  may  be  considered  a  fair  rally  or 
reaction  in  stock  prices  under  ordinary  circum- 
stances? 

5 — What  is  the  best  general  method  of  trad- 
ing? 

Some  of  these  questions  have  been  answered 
in  the  preceding  chapters,  but  they  will  be 
taken  up  here  in  turn  and  the  writer's  views 
submitted  on  each  head. 

1 — What  margins  are  necessary  to  reason- 
able safety? 

There  is  no  unqualified  answer  to  this  ques- 
tion. The  price  of  the  shares  operated  in  must 
be  considered.  All  other  things  being  equal, 
a  stock  selling  at  $50  would  require  only  half 
the  margin  employed  in  operating  in  a  security 

163 


164       THE  CYCLES  OF  SPECULATION 

selling  at  $100.  If  the  $50  stock  declines  25 
points,  it  has  suffered  a  quoted  loss  of  half  its 
value.  The  $100  stock,  however,  must  decline 
50  points  to  suffer  an  equal  loss.  This  per- 
centage of  advance  or  decline  is  established 
with  remarkable  fidelity  in  every  considerable 
movement. 

If  the  scale  order  is  employed  as  a  method 
of  accumulating  shares,  extraordinary  marginal 
provisions  must  be  made,  for  even  as  the  line 
acquired  increases,  the  original  margin 
dwindles.  The  scale  order  is,  or  should  be, 
based  on  the  assumption  that  a  temporary  de- 
cline below  the  first  purchase  price  is  desirable 
and  is  necessary  to  the  best  results.  This  fact, 
however,  should  never  be  contorted  in  such  a 
manner  as  to  instigate  purchases  at  high  prices. 
If  the  operator  who  employs  the  scale  order 
will  try  to  make  the  first  purchase  at  what  he 
considers  a  bargain  price,  or  in  other  words  at 
what  he  calculates  to  be  the  very  bottom  of  a 
movement,  he  will  surely  find  that  in  nine 
cases  out  of  ten,  his  own  errors  or  the  velocity 
which  frequently  carries  prices  to  ridiculously 
low  or  high  points  will  enable  him  to  accumu- 
late his  line  to  advantage.  The  scale  order 
should  never  be  used  on  its  mechanical  merits 
alone,  but  merely  as  a  method  of  averaging. 

It  goes  without  saying  that  marginal  ne- 
cessities will  be  principally  gauged  by  the  cor- 


CONCLUSION  165 

rectness  of  the  speculator's  general  views.  It 
is  the  writer's  opinion,  that  if  care  and  intelli- 
gence is  used  in  judging  values,  conditions,  and 
the  stages  of  the  market,  a  margin  of  20%  will 
be  sufficient  in  almost  all  cases.  That  is  to 
say,  20  points  on  a  stock  selling  at  par  and  10 
points  on  a  stock  selling  at  50.  It  must  be 
distinctly  understood,  however,  that  this 
opinion  contemplates  purchases  at  low  prices 
after  a  decline  has  occurred;  and  when  both 
the  technical  and  general  conditions  warrant 
purchases. 

The  late  Charles  H.  Dow  fixed  the  sum  of 
$2,500  as  the  minimum  amount  necessary  to 
safe  operating  in  ten  share  lots,  but  this  sum, 
or  any  other  for  that  matter,  is  an  arbitrary 
estimate.  Mr.  Dow's  figure  was  founded  on 
the  necessity  of  averaging  and  also  upon  a 
most  laudable  caution  and  conservatism  which, 
however,  might  at  times  result  in  unnecessary 
restriction  of  operations  at  a  most  favorable 
period.  There  are  times  when  $500  might  be 
safely  made  the  basis  of  trading  in  certain 
stocks;  there  are  other  times  and  other  stocks 
where  $2,500  would  be  wholly  insufficient. 

While  no  rule  of  thumb  is  possible  in  this 
regard,  it  is  the  writer's  opinion  that  there  is 
no  necessity  for  being  out  in  calculations  more 
than  20%,  provided  always  that  due  care  has 
been  exercised  in  basing  such  calculations. 


166       THE  CYCLES  OF  SPECULATION 

2 — Is  it  better  to  study  the  entire  list  or 
make  a  specialty  of  one  security? 

It  is  better  to  examine  the  conditions  and 
prices  of  all  the  leading  securities.  This  is  the 
only  method  by  which  comparative  values  may 
be  arrived  at.  It  is  frequently  the  case,  par- 
ticularly after  a  comprehensive  decline  or  a 
panic,  that  certain  excellent  shares  have  suf- 
fered almost  as  much  as  the  more  questionable 
securities.  At  such  times,  what  we  want  is  not 
only  a  good  bargain  but  the  best  bargain  ob- 
tainable, and  this  may  be  secured  more  readily 
by  a  careful  comparison  of  prices,  values  and 
income  return  than  by  any  other  method. 

Again,  in  an  upward  movement  stocks  gen- 
erally advance,  not  homogeneously,  but  one  at 
a  time  or  in  closely  related  groups.  Certain 
shares  may  have  a  reasonable  advance  while 
others  hang  fire.  If  we  have  good  reason  to 
believe  we  are  on  the  eve  of  a  great  bull  move- 
ment, the  best  results  may  be  attained  by  a 
process  of  rotation  in  trading. 

3 — What  class  of  securities  is  the  safest? 

Railroad  stocks  are  the  soundest  securities. 
The  danger  of  competition  is  not  so  great;  the 
assets  are  more  tangible  and  when  once  the 
specific  influences  which  are  now  working 
against  them  have  been  cured  or  eliminated, 
as  they  certainly  will  be  in  time,  these  shares 
will  show  a  steady  improvement  both  in  value 


CONCLUSION  167 

and  price.  At  times  the  very  best  stock  will 
suffer  severely  and  much  pessimistic  talk  will 
be  heard  of  receiverships,  etc.  That  is  the 
time  to  buy.  Lord  Rothschild  once  advised  a 
friend  to  buy  French  rentes.  "But  the  streets 
of  Paris  are  running  with  blood,"  replied  the 
recipient  of  the  advice.  "That,"  responded 
Rothschild,  "is  the  reason  you  can  buy  rentes 
so  cheaply."  The  man  who  purchases  the 
shares  of  railroads  when  they  are  greatly  de- 
pressed may  rest  serenely  in  the  consciousness 
that  the  future  of  American  railroads  is  assured 
and  that  measures  seeking  to  obstruct  pro- 
gress or  prevent  fair  returns  on  investments, 
either  in  the  way  of  income  on  money  or  the 
natural  accretion  of  values  cannot  possibly  en- 
dure. 

4 — What  may  be  considered  a  fair  rally  or 
reaction  in  stock  prices? 

Here  again  the  question  of  ruling  prices  of 
a  certain  stock  are  to  be  considered.  Low- 
priced  stocks  always  move  in  a  narrower  range 
than  do  higher  priced  ones.  The  extent  of  a 
probable  comparative  movement  may  be 
gauged  by  percentages  with  a  fair  degree  of 
accuracy.  This  method  of  measuring  a  com- 
parative advance  or  decline,  however,  will  be 
frequently  disturbed  by  specific  influences 
bearing  on  a  certain  stock  or  group  of  stocks. 

It  is  useless  to  undertake  to  establish  even 


168       THE  CYCLES  OF  SPECULATION 

a  rough  rule  for  ordinary  movements  by  a 
system  of  averages  culled  from  history.  We 
find  that  in  the  course  of  ten  years  the  rallies 
and  reactions  which  appeared  were  so  varied 
in  character  both  as  to  the  extent  in  points  and 
the  duration  in  days,  that  a  barometrical  aver- 
age founded  on  such  investigation  would  be 
empirical.  However,  the  results  of  this  in- 
ductive reasoning  will  be  given  for  what  they 
are  worth. 

The  principal  movements  for  ten  years  have 
been  as  follows: 

1.— The  Bull  Market  of  1897  to  1899. 

This  advance  began  in  April,  1897,  and  ter- 
minated in  April,  1899 — two  years  of  advancing 
prices.  The  average  advance  in  Industrial 
shares  was  38.79  points,  or  about  100%.  Rail- 
roads advanced  38.92  points,  or  about  80%. 

The  intermediate  reactions  were  as  follows: 


Date  of  Reaction 
Sept.  lo  toNov.  8, '97 
Jan.  7  to  Mar.  25.  '98 
Jun.  10  to  Jun.10,'98 
Aug.  26  to  Oct.  19, '98 
Jan.  30  to  Feb.  7,  '99 

2.— The  Bear  Market  of  1899-1900. 

This  decline  began  May  1st,  1899,  and  cul- 
minated Sept.  24,  1900—17  months.    The  aver- 


Extent  in 

Extent  in 

Industrials 

Rails 

Duration 

Points 

Points 

Days 

10.17 

9.78 

59 

8.67 

10.43 

78 

2.84 

2.93 

7 

9.41 

4.41 

54 

3.07 

3.38 

8 

CONCLUSION  169 

age  gross  decline  in  Industrial  shares  was 
24.32  points,  or  about  32%,  and  in  Rails,  13.27 
points,  or  about  18%. 

Intermediate  rallies  were  as  follows : 

Extent  in     Extent  in 


] 

Date  of  Rally 
May  31  to  Sep.  5,  '99 
Dec.   18,  '99,  to  Jan. 
2, '00 

[ndustrials 
Points 
10.10 

9.86 
5-09 
5.04 
2.76 

5.34 
2.10 

Rails 
Points 

8.17 

6.38 
4-56 

5-22 

3-42 

4.56 
2.31 

Duration 
Days 

97 
16 

Jan.  1 1  to  Feb.   5,'oo 
Mar.  9  to  Apr.    6,'oo 
May  15  to  June  i,'oo 
June  23  to  July23,'oo 
July  31  to  Aug.  15. . 

26 
29 
17 

n 

3.— The  Bull  Market  of  1901. 

The  advance  began  Oct.  1,  1900,  and  cul- 
minated Aug.  26,  1901,  11  months.  The  aver- 
age advance  in  Industrial  shares  was  20.87 
points,  or  about  397c.  The  average  advance 
in  Rails  was  37.92  points,  or  about  51%. 

Intermediate  reactions  were  as  follows : 

Extent  in  Extent  in 

Industrials  Rails  Duration 

Date  of  Reaction            Points  Points  Days 

Nov.  20  to  Dec.  8,  '00        5.09  1.67  19 
Dec.  27,  '00,  to  Jan. 

19, '01 6.29  4.39  24 

May  I  to  May  9.  ..  .        7.55  14.49  9 

June  17  to  July  15.  .        8.80  11.30  29 

July  29  to  Aug  6 .  .  .  .        3.89  6.64  9 


170       THE  CYCLES  OF  SPECULATION 
4. — The  Movement  of   1902. 

The  year  1902  is  particularly  interesting,  as 
it  shows  what  occurred  in  the  market  the  year 
prior  to  a  period  of  industrial  relaxation.  This 
year  cannot  be  called  either  a  bull  or  bear  year, 
as  while  railroad  stocks  advanced  and  closed 
the  year  with  net  gains,  the  Industrial  stocks 
suffered  material  declines.  As  the  declines  in 
Industrial  stocks  was  greater  than  the  advance 
in  Rails,  we  will  arbitrarily  designate  the  year 
as  a  bear  period  and  examine  the  homogeneous 
movement  for  rallies,  instead  of  reactions. 

From  Dec.  12,  1901,  to  Dec.  15,  1902,  In- 
dustrial shares  declined  5.74  points  and  rails 
advanced  3  points. 

Intermediate  rallies  were  as  follows: 


Date  of  Rally 
Feb.  20  to  Mar.2i,'o2 
Apr.  lo  to  Apr.  24 
May  19  to  May  24 
June  24  to  July  28 
Aug.  21  to  Sept.  19 
Sept.  29  to  Oct.  3 . 
Oct.  II  to  Oct.  17. 
Nov.  14  to  Nov.  21 


Extent  in 

Industrials 

Points 

2.84 

2.49 

2.09 

3.61 

2.44 

2.51 

2.73 
2.32 


Extent  in 
Rails 
Points 

3.45 
4.91 

3-99 

7-44 
4-05 
4.37 
4.96 
4.80 


Duration 
Days 

30 

15 
6 

35 
30 

5 

7 

8 


5.— The  Bear  Market  of  1903. 

This  decline  began  Jan.  8,  1903,  and  culmin- 
ated Nov.  9th,  of  the  year,  10  months.  The 
average  gross  decline  in  Industrial  shares  was 


CONCLUSION 


171 


24.18  points,  or  about  36^%.    The  decline  in 
Rails  was  32.48  points,  or  about  27%. 
The  intermediate  rallies  were  as  follows: 


Extent  in     Extent  in 


Date  of  Rally 
Jan.  20  to  Feb.  i6,'o3 
Mar.  lo  to  Mar.  20.  . 
Apr.  13  to  Apr.  30.  . 
June  10  to  June  12. 
Aug.  8  to  Aug.  17.  . 


idustrials 

Rails 

Duration 

Points 

Points 

Days 

3-51 

1.38 

28 

1.85 

3-II 

II 

3-77 

5-07 

9 

2.60 

4.48 

3 

6.50 

8.14 

10 

6.— The  Bull  Market  of  1904  and  1905. 

The  advance  began  Jan.  6,  1904,  and  cul- 
minated Jan.  22,  1906 — a  little  over  two  years. 
The  average  advance  in  Industrial  shares  was 
55.93  points,  or  about  119%.  The  average  ad- 
vance in  Rails  was  49.56  points,  or  about  55%. 

The  intermediate  reactions  were  as  follows: 


Extent  in 

Extent  in 

Industrials 

Rails 

Duration 

Date  of  Reaction             Points 

Points 

Days 

Jan.  27  to  Feb.  24,'o4       3.79 

4-17 

29 

Apr.  7  to  May  18 .  .  .        2.55 

4.03 

42 

Dec.  5  to  Dec.  12 .  .  .        7.46 

5-93 

8 

Apr.  14,  '05,  to  May 

8, '05                               9-23 

9.81 

25 

May  12  to  May  22.  .        6.68 

5-50 

II 

Aug.  23  to  Sept.  7.  .        4.21 

4.82 

16 

Nov.  1  to  Nov.  13  .  .  .        3.31 

4-74 

13 

The  year  1906  was  a  neutral  year.  Prices 
for  Industrials  declined  only  slightly  during 
the  year  and  average  prices  of  railroad  stocks 
were  the   same   in   December  as  in  January. 


172        THE  CYCLES  OF  SPECULATION 

Money  could  have  been  made  throughout  the 
period,  either  by  sales  on  rallies,  or  purchases 
on  declines.  As  a  consideration  of  a  neutral 
year  would  add  little  to  this  exhibit,  it  will  be 
omitted. 

5w — What  is  the  best  general  method  of 
trading? 

The  writer's  reply  to  this  question  consists 
principally  of  a  summing  up  of  points  already 
covered  in  other  portions  of  this  work.  It  is 
necessary  to  study  and  understand  the  subject 
thoroughly,  to  know  values,  general  conditions, 
the  technical  position  of  shares,  and  above  all 
things  to  consult  future  probabilities  rather 
than  past  performances.  Study  of  the  past  has 
its  educational  value  and  this  is  also  true  of 
the  present,  but  the  future  is  the  all-important 
thing.  Retrospective  speculation  is  one  of  the 
commonest  and  most  flagrant  of  the  numerous 
errors  made  by  public  participators.  Get  what- 
ever of  experience  and  information  you  can 
from  history,  but  speculate  on  the  future. 

The  man  who  enters  the  market  with  insuf- 
ficient capital,  who  expects  to  get  rich  quick 
or  who  allows  success  to  lead  him  into  ex- 
cesses and  over-speculation  will  lose.  It  is  as 
certain  as  death.  He  may  succeed  for  a  time 
but  not  for  long. 

Operations  based  on  "tips"  or  "charts"  will 
lead  to  final  disaster.    This  thing  of  trying  to 


CONCLUSION  173 

attribute  habits  to  a  market  is,  in  the  writer's 
opinion,  ridiculous.  The  movements  of  prices 
are  caused  by  events.  We  know  that  in  periods 
of  financial  stringency  or  business  depression 
prices  fall,  and  in  periods  of  inflation  and  good 
times  prices  rise.  It  is  possible  to  formulate 
a  system  founded  on  repetitions  applicable  to 
every  game  of  chance,  and  laid  out  on  paper, 
that  system  will  appear  infallible.  You  can 
find  the  exponents  of  machine-made  riches  in 
every  pool-room  and  gambling  house  in  the 
country.  They  all  eventually  lose  and  there 
is  nothing  to  show  that  the  advocates  of  charts 
as  a  basis  for  stock  trading  ever  fared  any  bet- 
ter. Imagine  James  R.  Keene,  or  J.  P.  Morgan 
poring  over  a  chart  and  operating  thereon. 
Even  if  the  market  did  have  habits,  as  soon  as 
these  habits  were  recognized  and  followed  by 
a  sufficient  number  of  people,  the  technical 
position  would  be  rendered  so  rotten  that  the 
charts  would  fail  from  that  influence  alone. 
Charts,  employed  as  a  convenient  method  of 
picturing  the  past,  may  have  a  certain  value, 
but  used  as  a  basis  for  trading  they  are  an  evi- 
dence of  laziness  or  incapacity,  or  both.  It  re- 
quires hard  work  to  be  successful  in  any  line. 
Thinking  is  hard  work,  study  is  hard  work, 
research  is  hard  work;  and  it  is  infinitely 
easier  to  bet  on  repetitions  all  nicely  laid  out 
in  crooked  lines  on  a  sheet  of  paper  than  to 


174        THE  CYCLES  OF  SPECULATION 

laboriously  erect  sound  deductions;  but  the 
difference  in  the  two  methods  is  that  one  will 
succeed  and  the  other  will  fail. 

We  may  also  resort  to  the  ultimatum  em- 
ployed by  those  eminent  citizens  who  punch 
each  other's  noses  in  a  prize-ring,  i.e.,  tell  the 
chart-players  to  "go  and  get  a  reputation." 
When  they  can  show  even  one  instance  of  a 
fortune  accumulated  by  this  method  their 
cause  will  be  greatly  strengthened. 

In  the  exception  taken  to  Mr.  Dow's  theory 
of  $2,500  being  the  minimum  amount  neces- 
sary for  operations  in  small  lots,  nothing  could 
be  further  from  the  present  writer's  intentions 
than  to  recommend  transactions  on  insufficient 
margin.  What  is  sought  is  merely  the  truth. 
The  contention  that  it  is  wise  to  stimulate  ex- 
treme conservatism  will  not  hold.  If  the 
naming  of  a  certain  sum  far  in  excess  of  real 
needs  is  praiseworthy,  we  may  expand  the  mat- 
ter indefinitely  and  name  $5,000  or  even  $10,- 
000,  as  the  limit. 

But  on  the  other  hand,  errors  on  the  side  of 
prudence  are  vastly  preferable  to  errors  on  the 
side  of  rashness.  In  this  as  in  all  other  things, 
the  golden  mean  is  the  really  desirable  factor. 

As  to  the  best  side  of  the  market  for  oper- 
ations, it  is  thought  that  the  long  side  offers 
the  greatest  opportunities.  The  long  side  is 
healthier,  it  is  constructive,  and  almost  all  the 


CONCLUSION  175 

great  fortunes  made  in  the  market  have  been 
founded  on  discreet  and  well-timed  purchases. 
To  adhere  to  this  plan,  however,  frequently  re- 
quires long  periods  of  non-participation,  and 
speculators  are  not,  as  a  class,  very  patient. 
The  man  who  can  so  school  himself  as  to  await 
opportunities  to  purchase  good  securities  at 
low  prices  has  by  far  the  best  of  the  bargain. 
Few  men  can  do  it. 

It  is  fully  realized  that  a  work  which  defends 
stock  speculation  in  any  degree,  will  meet  with 
much  criticism.  Nevertheless,  people  will 
speculate  and  if  you  are  one  of  those  who  will 
— do  it  right. 

It  is  submitted  in  concluding  this  work  that 
if  the  advice  here  given  is  heeded,  i.  e.,  to  know 
what  you  are  buying  and  why;  to  buy  only 
good  properties  when  prices  are  depressed;  to 
exercise  patience  and  provide  sufficient  capi- 
tal; to  eliminate  first  and  forever  the  idea  that 
correct  deductions  mean  sudden  riches;  to  use 
brains  instead  of  charts,  and  common-sense  in- 
stead of  tips;  in  short,  to  apply  to  speculative 
ventures  the  same  degree  of  business  fore- 
sight and  understanding  as  would  be  employed 
in  any  other  business,  the  evils  and  losses 
which  have  always  been  a  part  of  speculative 
history,  would  be  diminished  if  not  eliminated. 


INDEX 


Accidents:  Page 

effect  of  on  stock  prices 84 

Averages:  Barometer  of 110 

Bank    Statement 59,  125 

British  investment  bonds:   Prices  of 45 

Business    Depression:    Effects    of    on    reiils   and 

industrials    105 

"Calls,"    explained 89 

Charts:  "Composite  Common" 137 

corn   prices 149 

cotton    prices 154 

wheat  prices 147 

"Composite  common":  range  of 133 

Corn:  Area  limited 151 

chart    149 


prices 


146 


risen  more  than  wheat 148 

Cotton :    Chart 154 

crops  in  bales 157 

cycles  of  speculation  in 155 


prices 


156 


Credits:  Expansion  of  ignored 75 

Crises:   Indications    of 112 

principal  in  last  century 24 

Crops  and  Crop  Failures: 

damage  issue  not  to  be  ignored 123 

importance  of 82 

Dividends:  adverse  effect  on  the  short  seller 101 

Dow,  Charles  H.: 

rule  as  to  margins  necessary 165 


INDEX 

Page 

Fixed  Charges:  As  factor  of  safety 114 

important   to   investor 116 

percentage  of  in  various  railroads 115 

Gambling  transactions:  Percentage  against  the 

speculator    9 

Gold  production: 

effect  in  speculative  commodities 53 

effect  on  common  stocks  of  railroads 49 

effect  on  securities  having  a  fixed  rate  of 

income    43 

effect  on  stocks  of  industrials 52 

influence  of  on  prices 39 

Grain:  Cycles  of  speculation  in 145 

Legislation:  As  a  market  factor 77 

Manipulation:  By  creation  of  false  appearances    22 

Margins:  Necessary  to  reasonable  safety 163 

required  by  scale  order  operations 164 

use  and  abuse  of 12 

Market  Movements: 

principal   for   ten   years 168 

Money  conditions: 

as  a  factor  of  speculation 59 

Periodicity: 

unreliable  as  basis  of  speculation 35,    69 

Pig  Iron:  Production  in  U.  S 29 

Prices: 

"Composite"  stock 136 

corn   146 

cotton   156 

ordinary  swing  of  in  speculative  cycle 113 

wheat    145 

Presidential  contest:  Influence  on  prices 81 

Privileges    89 

"Puts,"    explained 90 

Railroad:  Basic  values  of 104 


INDEX 

Page 

Rights :  How  to  compute  value  of 109 

Securities:  Entire  list  should  be  studied 166 

railroad  stocks  the  soundest 166 

selection    of 124 

undigested     108 

Speculation :   Cycles  of 21 

possibilities  of 14 

preliminary   hard   work   needed 17 

Stocks:  Borrowing  and  lending 117 

Cycles  of   Speculation  in 133 

"Straddles/'    explained 92 

Tariff  agitation:  effect  on  speculation 81 

"Tips":  Operations  based  on  them  disastrous...  172 

Trading:   Best  method   of Ill,  172 

hypothetical    15 

scalping    120 

Wheat:    Chart 147 


pnces 


146 


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